UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

SCHEDULE 14A

 

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Exchange Act of 1934 (Amendment No.    )

 

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CARDINAL HEALTH, INC.

 

 

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Letter to Cardinal Health Shareholders

Gregory B. Kenny

Independent Lead Director and
incoming Chairman of the Board

September 26, 2018

Your Board of Directors is firmly committed to high standards of governance and oversight to assure Cardinal Health remains focused on building and delivering long-term shareholder value. One of my responsibilities as independent Lead Director is facilitating close coordination and communication between the Board and the management team. We also have established a practice of shareholder engagement that provides for good communication between the Board and shareholders, and I look forward to continuing that practice as non-executive Chairman of the Board of Directors.

We have made important progress in a number of areas over the past year, and I want to share the Board’s perspective on some of the changes now underway.

Successful Leadership Transition

Last fall, the Board implemented an orderly leadership transition, which will be completed at the Annual Meeting of Shareholders and positions the company well for the future. On January 1, 2018, Mike Kaufmann, previously our Chief Financial Officer, became Chief Executive Officer and joined the Board. Mike is a 28-year veteran of Cardinal Health and has held senior leadership positions in both the Pharmaceutical and Medical segments, in addition to serving as Chief Financial Officer. Mike has brought broad knowledge of the company’s operations and deep experience to his new role. We are very pleased with the initial progress the company is making under his leadership.

Jorge Gomez succeeded Mike as Chief Financial Officer. Jorge was Chief Financial Officer of the Medical segment and previously served as Chief Financial Officer of the Pharmaceutical segment, in addition to roles as both the company’s Treasurer and Corporate Controller. His extensive experience and familiarity with our businesses gave him a strong head start in his new role.

George Barrett, who had served as our Chairman and Chief Executive Officer since 2009, has continued as Executive Chairman of the Board and will do so until the Annual Meeting. George also has actively and effectively represented Cardinal Health in the healthcare public policy arena this past year. We are grateful to George for his strong leadership and commitment to Cardinal Health during his tenure.

Effective at the Annual Meeting, I will assume the role of non-executive Chairman of the Board, having served as Lead Director for the past four years and as a director since 2007. I look forward to continuing to work closely with the full Board and our leadership team to assure that our corporate governance practices continue to be aligned with the best interests of shareholders.

In my current role as Lead Director, I work closely with management in developing Board agendas, schedules and topics, including discussions regarding long-term strategies and capital deployment. I also have devoted significant time during my tenure to engagement with our large investors, have been active in overseeing our senior leadership transition and am leading our Board refreshment process described below. As Chairman, I will continue to carry out these responsibilities, working closely with Mike and your Board.

Comprehensive Review of the Business

To establish a foundation for future growth, the Board and management have initiated a comprehensive review of our business focused on our portfolio, cost structure and capital deployment. This review will allow us to more sharply focus on our business and strategy in order to deliver value to our stakeholders. The Board is actively engaged in this process. Three of our directors have been meeting regularly with senior management to discuss the progress of this review. The full Board receives regular updates, and we have extensive discussions about it.

One of the outcomes of this review was the creation of a valuable partnership with Clayton, Dubilier & Rice to jointly invest in our naviHealth business and accelerate its growth. Earlier in the fiscal year, we exited distribution operations in China, which were management and capital intensive. We also have begun significant cost reduction initiatives and will continue to be disciplined and thoughtful in our capital deployment approach.

Board Refreshment

As noted above, George Barrett will step down from the Board as part of our succession plan. Dave Anderson, Clay Jones and Dave King also are leaving the Board after many years of valuable service. I want to thank them for their leadership and significant contributions. We wish them well.

Our Nominating and Governance Committee is responsible for identifying and recommending director candidates to the Board, consistent with criteria that assure a balanced mix of relevant skills, tenure and diversity of experience and perspective. Earlier in the year, the committee identified, and the Board elected, Akhil Johri as a new director. Akhil has brought additional deep financial expertise and a broad global business background to our Board. The Nominating and Governance Committee has been actively engaged in a search to identify additional directors to complement the expertise and experience of our current directors.

 

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Board Oversight and the Opioid Epidemic

The Board is deeply concerned by and attentive to the devastating impact on our communities of the over-prescribing of opioid pain medications and the abuse of pain medications as well as illegal “street” narcotics. The Board has sought to position Cardinal Health as a leader in helping to solve this complex national public health crisis, including through our long-standing Generation Rx program and more recent initiatives, such as those aimed at educating patients and prescribers regarding these medications. While we do not prescribe medications, we understand and take seriously our responsibility as a pharmaceutical distributor to maintain a rigorous anti-diversion program and ensure that medications are available for patients who need them.

The Board has been and remains active in overseeing Cardinal Health’s response to the nationwide opioid epidemic, including our opioid anti-diversion program. In February 2018, the Board formed an Ad Hoc Committee of independent directors to build upon the Board’s earlier work in this area and further assist the Board in its oversight of opioid-related issues. The Ad Hoc Committee, which consists of myself and three other independent directors, meets regularly and reports at every Board meeting.

Looking Ahead

Cardinal Health has made significant progress in many areas in fiscal 2018, and the Board is committed to building on this progress in fiscal 2019. We are well underway implementing initiatives to position the company for the future, and we are confident about Cardinal Health’s prospects to create value for our shareholders and our other important stakeholders.

On behalf of our Board of Directors, we thank you for your share ownership in Cardinal Health and your continued support of the company. I look forward to continuing our ongoing and active dialogue.

Sincerely,

Gregory B. Kenny
Independent Lead Director and
incoming Chairman of the Board

 

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Notice of Annual Meeting of Shareholders

Wednesday, November 7, 2018

8:00 a.m. Eastern Time

Cardinal Health, Inc.
7000 Cardinal Place

Dublin, Ohio 43017

Important notice regarding the availability of proxy materials for the Annual Meeting of Shareholders to be held on November 7, 2018:

This Notice of Annual Meeting of Shareholders, the accompanying proxy statement and our fiscal 2018 Annual Report to Shareholders are available at www.edocumentview.com/cah. These proxy materials are first being sent or made available to shareholders commencing on September 26, 2018.

Purpose

To vote on the following proposals:

Who may vote:

Shareholders of record at the close of business on September 10, 2018 are entitled to notice of, and to vote at, the meeting or any adjournment or postponement.

 

By Order of the Board of Directors.

 

September 26, 2018

Jessica L. Mayer
Executive Vice President, Deputy General Counsel
and Corporate Secretary

 

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Proxy Summary

This summary highlights information contained elsewhere in our proxy statement. This summary does not contain all the information that you should consider, and you should carefully read the entire proxy statement and our fiscal 2018 Annual Report to Shareholders before voting. References to our fiscal years in the proxy statement mean the fiscal year ended or ending on June 30 of such year. For example, “fiscal 2018” refers to the fiscal year ended June 30, 2018.

Fiscal 2018 Highlights

In fiscal 2018, we positioned the company for future growth, making a number of changes. In November 2017, we announced our succession plans for Chief Executive Officer and Chief Financial Officer, followed by other senior leadership changes later in the fiscal year. These transitions have gone very well.

 

The following are fiscal 2018 performance highlights:

To establish a foundation for future growth, we initiated a comprehensive review of our business focused on our portfolio, cost structure and capital deployment. Fiscal 2018 accomplishments and future areas of focus include:

See Annex A for the reasons why we use non-GAAP financial measures and reconciliations to the comparable GAAP financial measures.

Governance and Board Highlights

 

 

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Our 2018 Board Nominees

 

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Addressing the Opioid Crisis

Our Board of Directors (“Board”) and the entire Cardinal Health team care deeply about the devastating impact on our communities of the over-prescribing of opioid pain medications and the abuse of pain medications and illegal “street” narcotics. We are working to help solve this complex national public health crisis. Like so many others across this nation, we have family members, friends and colleagues who have been impacted by the devastating consequences of opioid overuse and abuse. We also have family members, friends and colleagues who rely on these medications to address suffering associated with terminal illnesses, painful neurological conditions, severe injuries and recovery from surgeries.

One of the key public policy issues that must be solved in addressing the opioid epidemic is the challenge posed by the over-prescribing of opioids. As a pharmaceutical wholesale distributor, we do not control either the supply of, or the demand for, opioids, since we do not manufacture medications or write prescriptions. We understand and take seriously our responsibility to maintain a rigorous anti-diversion program, while ensuring that medications are available for patients who need them. And, of course, we do not have any involvement with the serious problem of dangerous illegal street drugs.

Role in Pharmaceutical Supply Chain and Supply Chain Integrity

Anti-diversion Program

We distribute all types of medications, including those used to treat high blood pressure, diabetes and cancer, as well as those used to treat acute and chronic pain. With respect to opioid pain medications, we are industry leaders in implementing state-of-the-art controls to combat the diversion of these medications from legitimate uses. Our program includes advanced analytics, technology and on-the-ground deployment of investigators to evaluate our pharmacy customers, scrutinize their orders and block and report orders that do not meet our strict anti-diversion criteria. We continuously improve our program, while remaining committed to our critical role in supplying pharmacies the medications that they need for their patients.

 

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Board Engagement and Governance

The Board is committed to ensuring that Cardinal Health is a positive force in solving the opioid epidemic. The Board and its committees regularly review our anti-diversion and controlled substance monitoring systems and our ethics and compliance program with members of management who are responsible for the day-to-day operation of these systems and program. The Board also has supported the company’s Opioid Action Program and its initiatives aimed at addressing the crisis.

In 2012, the Board appointed a special committee of independent directors to conduct a review, utilizing independent counsel, of our anti-diversion program. The committee produced reports in 2013 and 2014 that found that we had implemented and maintained a robust system of controls to detect and report suspicious orders and that our Board was well-informed about those controls. More details about this special committee and its reports are found on our website at www.cardinalhealth.com under “About Us — Corporate Citizenship — Addressing the Opioid Crisis: Board Engagement and Governance.”

In February 2018, the Board formed an Ad Hoc Committee of independent directors to assist the Board in its oversight of opioid-related issues. The Ad Hoc Committee is responsible for assisting the Board in overseeing the company’s multifaceted response to the opioid epidemic and providing advice, regular reports and recommendations to the Board on these issues. The members of the Ad Hoc Committee are:

The Ad Hoc Committee met seven times from February 2018 through September 2018 and will continue to meet regularly. During its meetings, the Ad Hoc Committee receives and discusses reports from management and the company’s external advisors (as appropriate) and provides input and direction. For example, the Ad Hoc Committee receives updates regarding:

Generation Rx and Opioid Action Program

Cardinal Health has been a leader for nearly a decade in pioneering and supporting impactful prevention and education programs to combat opioid abuse and diversion under the umbrella of Generation Rx. In November 2017, we began our Opioid Action Program with four elements, each cited by leading experts as critical to the fight to reduce opioid abuse and casualties:

Medical school training

With our support, more than 90 medical school faculty members from 30 schools recently gathered to begin work on a curriculum for medical schools across the country to teach future physicians better prescribing practices to manage pain and how to respond to prescription opioid misuse and abuse. The participants are developing a white paper detailing an opioid-management curriculum that can be adopted and implemented by medical schools nationwide.

Prevention education and better prescribing practices

We have awarded over 70 grants, including prevention education grants, prescriber grants and community grants, to non-profit organizations fighting opioid abuse and misuse and providing education, advocacy and support.

Narcan donation program

We have provided more than 75,000 dosage units of overdose-reversing Narcan free of charge for use by first responders and law enforcement.

Drug take back

In partnership with a customer, we supported drug take-back events at over 100 locations in 26 states during 2018, with more than 100 Cardinal Health employee volunteers and local law enforcement and DEA officials providing safe, secure disposal of medications.

 

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Attending the Annual Meeting of Shareholders

See page 55 for instructions on how to gain admission to Cardinal Health’s 2018 Annual Meeting of Shareholders (the “Annual Meeting”).

Roadmap to Voting Matters

Shareholders will be asked to vote on the following proposals at the Annual Meeting:

How to Vote

 

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Corporate Governance

Our Board of Directors currently has 12 members. Nine of our directors are standing for election at the Annual Meeting to serve until the next Annual Meeting of Shareholders and until their successor is duly elected and qualified. Other than Messrs. Kaufmann and Johri, who joined the Board in January and February 2018, respectively, all nominees were elected at last year’s Annual Meeting of Shareholders. Given his retirement at the Annual Meeting, Executive Chairman of the Board Barrett is not standing for re-election. In addition, Clayton M. Jones and David P. King, directors since 2012 and 2011, respectively, have decided not to stand for re-election at the Annual Meeting. The size of the Board will be reduced to nine at that time.

David J. Anderson, a director since 2014, resigned from the Board in September 2018 in light of his new responsibilities as Chief Financial Officer of Nielsen Holdings plc.

Each director nominee agreed to be named in this proxy statement and to serve if elected. If, due to death or other unexpected occurrence, one or more of the director nominees is not available for election, proxies will be voted for the election of all remaining nominees and any substitute nominee the Board selects.

Board Membership Criteria: What we look for

The Nominating and Governance Committee considers and reviews with the Board the appropriate skills and characteristics for Board members in the context of the Board’s current composition and objectives. Criteria for identifying and evaluating candidates for the Board include:

Our Director Nominees

The Board seeks members that possess the experience, skills and diverse backgrounds to perform effectively in overseeing the company’s current and evolving business and strategic direction and to properly perform the Board’s oversight responsibilities. All of our director nominees bring to the Board a wealth of executive leadership experience derived from their diverse professional backgrounds and areas of expertise. As a group, they have business acumen, healthcare and global business experience and financial expertise, as well as public company board experience. Each of our director nominees has sound judgment and integrity and is able to commit sufficient time and attention to the activities of the Board. All director nominees other than our Chief Executive Officer are independent.

 

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Colleen F. Arnold

		Senior Vice President, Sales and Distribution, International Business Machines Corporation (retired)
		Director Qualification Highlights •  Information Technology •  International and Global Leadership •  Operations	Other Public Boards: WestRock Company, a multinational provider of paper and packaging solutions (since July 2018)
Age 61 Director since: 2007 Board Committees: Nominating and Governance Independent Director		Biography   Ms. Arnold was Senior Vice President, Sales and Distribution of International Business Machines Corporation (“IBM”), a provider of systems, financing, software and services, from 2014 until 2016. From 1998 to 2014, she held a number of senior positions with IBM, including: Senior Vice President, Application Management Services, IBM Global Business Services; General Manager of GBS Strategy, Global Consulting Services, Global Industries and Global Application Services; General Manager, Europe; General Manager, Australia and New Zealand Global Services; and CEO, Global Services Australia, an IBM joint venture.   Skills and Qualifications of Particular Relevance to Cardinal Health A former senior executive of IBM for over 15 years, Ms. Arnold’s significant experience in the areas of information technology and global leadership contributes to the Board’s discussions regarding our business and strategy. Given her extensive international business experience, including leadership of international commercial operations at IBM, Ms. Arnold provides valuable insights for our presence in international markets. She also brings to the Board more than 30 years of relevant experience in the areas of executive leadership and strategic planning.

 

Carrie S. Cox

		Executive Vice President and President of Global Pharmaceuticals, Schering-Plough Corporation (retired); Chairman and Chief Executive Officer of Humacyte, Inc. (retired)
		Director Qualification Highlights •  Healthcare •  Regulatory / Public Policy •  Board Leadership •  International •  Operations	Other Public Boards: Texas Instruments Incorporated, a developer, manufacturer and marketer of semiconductors (since 2004); Celgene Corporation, a biopharmaceutical company (since 2009); electroCore, Inc., a commercial-stage bioelectronic medicine company (since June 2018); Array BioPharma Inc., a commercial-stage biopharmaceutical company (since August 2018)
Age 61 Director since: 2009 Board Committees: Human Resources and Compensation, Ad Hoc Independent Director		Biography   Ms. Cox serves as Executive Chairman of Humacyte, Inc., a privately held, development stage company focused on regenerative medicine, where she previously served as Chairman and Chief Executive Officer from 2010 to June 2018. She was Executive Vice President and President of Global Pharmaceuticals at Schering-Plough Corporation, a multinational branded pharmaceutical manufacturer, from 2003 until its merger with Merck & Co. in 2009. She was Executive Vice President and President of the Global Prescription Business of Pharmacia Corporation, a pharmaceutical and biotechnology company, from 1997 to 2003.   Skills and Qualifications of Particular Relevance to Cardinal Health Through her roles as an executive of Schering-Plough, President of Pharmacia’s Global Prescription business, Chief Executive Officer of Humacyte and a licensed pharmacist, Ms. Cox brings to the Board substantial expertise in healthcare, particularly the branded pharmaceutical and international aspects. She worked in the global branded pharmaceutical industry for over 30 years, giving her relevant experience with large, multinational healthcare companies in the areas of regulatory compliance, global markets and manufacturing operations. She also brings to the Board valuable perspectives and insights from her service on the boards of directors of Celgene, including its Compensation and Development Committee, and Texas Instruments, including its Compensation Committee, as well as her former service as Texas Instruments’ Lead Director.

 

 

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Calvin Darden

		Senior Vice President of U.S. Operations of United Parcel Service, Inc. (retired)
		Director Qualification Highlights •  Operations •  Distribution / Supply Chain •  Labor Relations	Other Public Boards: Target Corporation, an operator of large-format general merchandise discount stores (since 2003); Aramark Corporation, a global provider of food, facilities and uniform services (since February 2018); Coca-Cola Enterprises, Inc., a marketer, manufacturer and distributor of nonalcoholic beverages in selected international markets (2004 – 2016)
Age 68 Director since: 2005 Board Committees: Human Resources and Compensation, Ad Hoc Independent Director		Biography   Mr. Darden was Senior Vice President of U.S. Operations of United Parcel Service, Inc. (“UPS”), an express carrier and package delivery company, from 2000 until 2005. During his 33-year career with UPS, he served in a number of senior leadership positions, including developing the corporate quality strategy for UPS and leading the business and logistics operations for its Pacific Region, the largest region of UPS at that time.   Skills and Qualifications of Particular Relevance to Cardinal Health A former executive officer of UPS, Mr. Darden has expertise in supply chain networks and logistics that contributes to the Board’s understanding of these important aspects of our business. He has over 30 years of relevant experience in the areas of operations, distribution and supply chain, efficiency and quality control, human resources and labor relations. He also brings to the Board valuable perspectives and insights from his service on the boards of directors of Target and Aramark Corporation, including their respective Compensation Committees, as well as his prior service on the board of directors of Coca-Cola Enterprises, including its Human Resources and Compensation Committee.

 

Bruce L. Downey

		Chairman and Chief Executive Officer of Barr Pharmaceuticals, Inc. (retired); Partner of NewSpring Health Capital II, L.P.
		Director Qualification Highlights •  Healthcare •  Regulatory / Public Policy •  Operations •  International •  Financial Expertise •  Board Leadership	Other Public Boards: Momenta Pharmaceuticals, Inc., a biotechnology company (since 2009)
Age 70 Director since: 2009 Board Committees: Audit, Ad Hoc Independent Director		Biography   Mr. Downey was Chairman and Chief Executive Officer of Barr Pharmaceuticals, Inc., a global generic pharmaceutical manufacturer, from 1994 to 2008. Mr. Downey has served on a part-time basis as a Partner of NewSpring Health Capital II, L.P., a venture capital firm, since 2009.   Skills and Qualifications of Particular Relevance to Cardinal Health Having spent 14 years as Chairman and Chief Executive Officer of Barr Pharmaceuticals, Mr. Downey brings to the Board substantial global experience in the areas of healthcare, regulatory compliance, manufacturing operations, finance, human resources and corporate governance. He offers valuable experience in the pharmaceutical and international aspects of our businesses. Mr. Downey brings to the Board valuable perspectives and insights from his service on the board of directors of Momenta Pharmaceuticals, including on its Audit Committee, and from his prior service as Chairman of Barr Pharmaceuticals’ board of directors. Before his career at Barr Pharmaceuticals, Mr. Downey was a practicing attorney for 20 years, having worked in both private practice and with the U.S. Department of Justice.

 

 

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Patricia A. Hemingway Hall

		President and Chief Executive Officer of Health Care Service Corporation (retired)
		Director Qualification Highlights •  Healthcare •  Regulatory / Public Policy •  Financial Expertise •  Information Technology •  Board Leadership	Other Public Boards: ManpowerGroup Inc., a workforce solutions company (since 2011); Celgene Corporation, a biopharmaceutical company (since April 2018)
Age 65 Director since: 2013 Board Committees: Audit, Nominating and Governance Independent Director		Biography   Ms. Hemingway Hall served as President and Chief Executive Officer of Health Care Service Corporation, a mutual health insurer (“HCSC”), from 2008 until 2016. Previously, she held several leadership positions at HCSC, including President and Chief Operating Officer from 2007 to 2008 and Executive Vice President of Internal Operations from 2006 to 2007.   Skills and Qualifications of Particular Relevance to Cardinal Health As retired President and Chief Executive Officer of HCSC, the largest customer-owned health insurer in the United States operating through several state Blue Cross and Blue Shield Plans, Ms. Hemingway Hall brings to the Board valuable experience regarding evolving healthcare payment models at a time of change and reform in the healthcare industry. She has worked in the healthcare industry for over 30 years, first as a registered nurse and later in health insurance, and has relevant experience in the areas of healthcare reform, regulatory compliance, government relations, finance, information technology and human resources. She also brings to the Board valuable perspectives and insights from her service on the boards of directors of ManpowerGroup and Celgene, including their respective Audit Committees, as well as from chairing ManpowerGroup’s Nominating and Governance Committee.

 

Akhil Johri

		Chief Financial Officer, United Technologies Corporation
		Director Qualification Highlights •  Financial Expertise (Current CFO) •  International •  Acquisitions •  Information Technology	Other Public Boards: None
Age 57 Director since: February 2018 Board Committees: Audit Independent Director		Biography   Mr. Johri has served as Chief Financial Officer of United Technologies Corporation (“UTC”), a provider of high technology products and services to the building systems and aerospace industries, since 2015. From 2013 to 2014, he served as Chief Financial Officer and Chief Accounting Officer of Pall Corporation, a global supplier of filtration, separations and purifications products, and from 2011 to 2013, he was Vice President of Finance and Chief Financial Officer of UTC Propulsion & Aerospace Systems, which included Pratt & Whitney and UTC Aerospace Systems. Mr. Johri’s prior roles with UTC include leading investor relations, as well as holding senior financial roles with global business units, including 12 years in the Asia Pacific Region.   Skills and Qualifications of Particular Relevance to Cardinal Health Having spent more than 25 years in financial leadership positions with UTC and Pall Corporation, Mr. Johri brings to the Board substantial experience in the areas of global finance and accounting, international markets, mergers and acquisitions, information technology and investor relations. Drawing upon his financial expertise, he provides valuable insights in the areas of financial reporting, accounting, internal controls and capital markets, as well as international tax and finance. Through his experience in senior leadership roles with UTC’s businesses, he provides a deep understanding of financial and strategic implications impacting a publicly-traded multinational company.

 

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Michael C. Kaufmann

		Chief Executive Officer, Cardinal Health, Inc.
		Director Qualification Highlights •  Cardinal Health Operations •  Healthcare •  Financial Expertise (Former CFO) •  International •  Acquisitions •  Regulatory / Public Policy	Other Public Boards: MSC Industrial Direct Co., Inc., a distributor of metal working, maintenance, repair and operations products and services (since 2015)
Age 55 Director since: January 2018		Biography   Mr. Kaufmann has served as Chief Executive Officer of Cardinal Health since January 2018. From 2014 to December 2017, he served as Chief Financial Officer and from 2009 to 2014, he served as Chief Executive Officer – Pharmaceutical Segment. Prior to that, he held a range of other senior leadership roles at Cardinal Health across operations, sales and finance, including in both the Pharmaceutical and Medical segments.   Skills and Qualifications of Particular Relevance to Cardinal Health As our Chief Executive Officer and a 28-year veteran of Cardinal Health, Mr. Kaufmann draws on his deep knowledge of our daily operations and our industry, customers, vendors, employees and shareholders to provide the Board with a unique and very important perspective on the company and a conduit for information from management. Prior leadership positions across the company provide him with expertise in the areas of healthcare, distribution operations, finance, international markets, mergers and acquisitions and regulatory compliance. He also provides the Board with an understanding of the strategic and financial implications impacting our company from having played an important role in key strategic initiatives, including the Red Oak Sourcing joint venture with CVS Health. In addition, Mr. Kaufmann brings relevant experience and perspectives to the Board from his service on the board of directors of MSC Industrial Direct, including its Audit and Compensation Committees.

 

Gregory B. Kenny

		President and Chief Executive Officer of General Cable Corporation (retired)
		Director Qualification Highlights •  Board Leadership •  Operations •  International •  Financial Expertise	Other Public Boards: Ingredion Incorporated, a corn refining and ingredient company (since 2005); AK Steel Holding Corporation, an integrated producer of flat-rolled, carbon and electrical stainless steels and tubular products (since 2016); General Cable Corporation (1997 – 2015)
Age 65 Director since: 2007 Board Committees: Nominating and Governance, Ad Hoc Independent Lead Director and Chairman of the Board, effective November 2018		Biography   Mr. Kenny served as President and Chief Executive Officer of General Cable Corporation, a global manufacturer of aluminum, copper and fiber-optic wire and cable products, from 2001 until 2015. Prior to that, he was President and Chief Operating Officer of General Cable from 1999 to 2001 and Executive Vice President and Chief Operating Officer from 1997 to 1999. Mr. Kenny previously served in executive level positions at Penn Central Corporation, where he was responsible for corporate business strategy, and in diplomatic service as a Foreign Service Officer with the U.S. Department of State.   Skills and Qualifications of Particular Relevance to Cardinal Health Mr. Kenny, who has been selected as our non-executive Chairman of the Board effective at the Annual Meeting, brings to the Board significant experience in the areas of Board leadership, manufacturing operations, international markets, finance, human resources and corporate governance. He provides the Board with a deep understanding of the strategic and financial implications impacting a global business with manufacturing and distribution operations. He also draws upon his Board governance and leadership experience as Chairman of our Nominating and Governance Committee, the past Chairman of our Human Resources and Compensation Committee and Chairman of the Board and Chairman of the Corporate Governance and Nominating Committee at Ingredion. As our independent Lead Director, Mr. Kenny has promoted strong independent Board leadership during our recent senior leadership transitions and a robust, deliberative decision-making process among independent directors. He also meets with shareholders and represents their perspectives in Board discussions. Mr. Kenny also brings to the Board valuable perspectives and insights from his service on AK Steel’s board of directors and his prior service on General Cable’s board of directors.

 

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Nancy Killefer

		Senior Partner, Public Sector Practice, McKinsey & Company, Inc. (retired)
		Director Qualification Highlights •  Strategic Planning •  Healthcare •  Regulatory / Public Policy •  Financial Expertise •  Board Leadership	Other Public Boards: Avon Products, Inc., a global manufacturer and marketer of beauty products (since 2013); Computer Sciences Corporation, a global provider of information technology services (2013 – 2015); The Advisory Board Company, a provider of software and solutions to the healthcare and education industries (2013 – 2017); CSRA, Inc., a provider of information technology services to the U.S. federal government (2015 – April 2018)
Age 64 Director since: 2015 Board Committees: Human Resources and Compensation Independent Director		Biography   Ms. Killefer served as Senior Partner of McKinsey & Company, Inc., a global management consulting firm, from 1992 until 2013. She joined McKinsey in 1979 and held a number of key leadership roles, including serving as a member of the firm’s governing board. Ms. Killefer founded McKinsey’s Public Sector Practice in 2007 and served as its managing partner until her retirement. She also served as Assistant Secretary for Management, Chief Financial Officer and Chief Operating Officer for the U.S. Department of Treasury from 1997 to 2000.   Skills and Qualifications of Particular Relevance to Cardinal Health Having served in key leadership positions in both the public and private sectors and provided strategic counsel to healthcare and consumer-based companies during her 30 years with McKinsey, Ms. Killefer brings to the Board substantial experience in the areas of strategic planning, including healthcare strategy and marketing and brand-building. Her extensive experience as managing partner of McKinsey’s Public Sector Practice and as a chief financial officer of a government agency provides valuable insights in the areas of government relations, public policy and finance. Ms. Killefer also brings to the Board valuable perspectives and insights from her service on the boards of directors of Avon Products, including its Compensation and Management Development Committee, The Advisory Board and CSRA, Inc., including as its independent Chair.

 

Director Skills Matrix

Our director nominees possess relevant experience, skills and qualifications that contribute to a well-functioning Board that effectively oversees the company’s strategy and management.

 

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Our Board’s Composition and Structure

Our Board Leadership Structure

Our Board is currently led by an Executive Chairman of the Board and an independent Lead Director with a separate Chief Executive Officer. The Board has selected Mr. Kenny to serve as the non-executive Chairman of the Board effective at the Annual Meeting when our Executive Chairman retires.

Our Corporate Governance Guidelines provide that the Board is responsible for selecting the Chairman of the Board and the Chief Executive Officer. While historically, these roles have been combined, the Board decided to separate the roles when it appointed Mr. Kaufmann as Chief Executive Officer. In making this change, the Board considered a wide range of factors, including current market practice and the views of shareholders, and selected the leadership structure that the Board determined most appropriate at the present time. The Nominating and Governance Committee periodically reviews and assesses the Board’s leadership structure.

Mr. Kenny has served as independent Lead Director (elected annually by the independent directors) since November 2014. In that role, he

Board Diversity

Our Corporate Governance Guidelines provide that the Board should be diverse, engaged and independent. In identifying and evaluating candidates for the Board, the Nominating and Governance Committee considers the diversity of the Board, including diversity of skills, experience and backgrounds, as well as ethnic and gender diversity. We believe that our Board nominees appropriately reflect a diversity of skills, of professional, gender, ethnic and personal backgrounds, and of experience. We also believe that they strike the right balance of longer serving and newer directors.

 

 

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How We Identify, Add and On-Board New Directors

The Nominating and Governance Committee is responsible for identifying, reviewing and recommending candidates for Board membership. Our Board is responsible for selecting candidates for election as directors.

While the process may vary depending on the director candidate, a search firm identified Mr. Johri and the Nominating and Governance Committee recommended him using the following approach:

Upon joining the Board, Mr. Johri participated in a comprehensive, full-day director orientation program, which included meetings with senior management. This orientation program helps new directors become familiar with our businesses and strategy, significant financial matters, ethics and compliance program, corporate governance practices, risk management, human resources and investor relations.

Director Attendance

The Board held nine meetings during fiscal 2018. Each director attended 75% or more of the meetings of the Board and Board committees on which he or she served during the fiscal year.

Ten of our 11 directors at the time attended the 2017 Annual Meeting of Shareholders. Absent unusual circumstances, each director is expected to attend the Annual Meeting of Shareholders.

Board Committees

The Board has an Audit Committee, a Nominating and Governance Committee and a Human Resources and Compensation Committee (the “Compensation Committee”). Each member of these committees is independent under our Corporate Governance Guidelines and under applicable committee independence rules.

The charter for each of these committees is available on our website at www.cardinalhealth.com under “About Us — Corporate — Investor Relations — Corporate Governance — Board Committees and Charters.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department.

In February 2018, the Board formed an Ad Hoc Committee of independent directors to assist the Board in its oversight of opioid-related issues.

 

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Audit Committee

Members:(1)   Clayton M. Jones (Chair)(2) Bruce L. Downey Patricia A. Hemingway Hall Akhil Johri(3)   Meetings in fiscal 2018: 7	The Audit Committee’s primary duties are to: • oversee the integrity of our financial statements, including reviewing annual and quarterly financial statements and earnings releases and the effectiveness of our internal and disclosure controls; • appoint the independent auditor and oversee its qualifications, independence and performance, including pre-approving all services by the independent auditor; • review our internal audit plan and oversee our internal audit department; • approve the appointment of our Chief Legal and Compliance Officer and oversee our ethics and compliance program and our compliance with applicable legal and regulatory requirements; and • oversee our major financial and information technology risk exposures and our process for assessing and managing risk through our enterprise risk management program. The Board has determined that each member of the Audit Committee is an “audit committee financial expert” for purposes of the Securities and Exchange Commission (“SEC”) rules.

Nominating and Governance Committee

Members:   Gregory B. Kenny (Chair) Colleen F. Arnold Patricia A. Hemingway Hall   Meetings in fiscal 2018: 4	The Nominating and Governance Committee’s primary duties are to: • identify, review and recommend candidates for the Board, including recommending criteria to the Board for potential Board candidates and assessing the qualifications, attributes, skills, contributions and independence of individual directors and director candidates; • make recommendations to the Board concerning the structure, composition and functions of the Board and its committees; • advise the Board on Board leadership and leadership structure; • review our corporate governance guidelines and practices and recommend changes; • conduct the annual Board evaluation and oversee the process for the evaluation of each director; and • oversee our policies and practices regarding political expenditures.

 

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Human Resources and Compensation Committee

 

Ad Hoc Committee

Members:   Bruce L. Downey (Chair) Carrie S. Cox Calvin Darden Gregory B. Kenny   Meetings from February 2018 formation through September 2018: 7

The Ad Hoc Committee assists the Board in its oversight of Cardinal Health’s response to the nationwide problem of prescription opioid abuse by providing advice, regular reports and recommendations to the Board. During its meetings, the Ad Hoc Committee receives and discusses reports from management and the company’s external advisors (as appropriate) and provides input and direction. For example, the Ad Hoc Committee receives updates regarding: • anti-diversion and controlled substance monitoring programs; • potential solutions to alleviate the opioid epidemic; • risks posed by the opioid epidemic to Cardinal Health from a legal, financial and reputational perspective; • litigation, including the Multi-District Litigation before Judge Polster in Ohio and related settlement discussions; • the investigations and negotiations led by the State Attorneys General “Multistate” Group; • changes in the regulatory and legislative environment; • Cardinal Health’s Opioid Action Program; and • corporate governance and engagement with key stakeholder groups, including shareholders, customers, employees and others.

 

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Our Board’s Primary Role and Responsibilities and Processes

Our Board’s Primary Role and Responsibilities

Our Corporate Governance Guidelines provide that our Board serves as the representative of, and acts on behalf of, all the shareholders of Cardinal Health. In that regard, some primary functions of the Board include:

How our Board Oversees Our Performance, Strategy and Capital Deployment

The Board receives regular updates on company performance and regularly discusses our strategy in light of our performance, the competitive environment, developments in the rapidly changing healthcare industry and the global business and economic environment. The Board reviews and approves capital deployment, including dividends, share repurchase plans and significant acquisitions and divestitures.

At least annually, the Board conducts a dedicated strategy session with in-depth discussions of the healthcare industry, specific businesses and new business opportunities. These sessions include external speakers, such as business partners and advisors, as well as off-site visits to company facilities and customer locations. At these sessions, the Board discusses risks related to our strategies, including those resulting from possible competitor, customer and supplier actions, the changing healthcare industry and new technologies. The Board also discusses various elements of strategy at each regular quarterly meeting. The collective backgrounds, skills and experiences of our directors, including broad healthcare experience, contribute to robust discussions of strategy and the related risks.

The following are some recent examples of our Board’s oversight and engagement in these areas:

How our Board Engages in Management Succession

The Board is actively engaged in our talent management program. The Compensation Committee oversees the process for succession planning for the Chief Executive Officer and other senior executives, and management provides an organizational update at each quarterly Compensation Committee meeting.

The full Board holds a formal succession planning and talent review session annually, which includes succession planning for the Chief Executive Officer and other senior executives. These sessions include identification and development of internal candidates and take into account desired leadership skills and key capabilities and experience in light of our current and evolving business and strategic direction.

Directors interact with our leaders through Board presentations and discussions, as well as through informal events and interactions throughout the year in small group and planned one-on-one sessions.

As a result of our succession planning process, effective January 1, 2018, the Board appointed Mr. Kaufmann as Chief Executive Officer and Mr. Gomez as Chief Financial Officer. Mr. Kaufmann succeeded Mr. Barrett, who had served as Chairman and Chief Executive Officer for nine years. The Board considered both Mr. Kaufmann’s deep understanding of the company and healthcare industry and his strong performance in senior leadership roles in selecting him as Cardinal Health’s next Chief Executive Officer.

The Board maintains an emergency succession plan, as well as a long-term succession plan for the position of Chief Executive Officer.

 

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How our Board Oversees Risk

Management has day-to-day responsibility for assessing and managing risks, and the Board is responsible for risk oversight. Management has developed and administers an enterprise risk management process, which the Audit Committee oversees. Through this process, management identifies and prioritizes enterprise risks and develops systems to assess, monitor and mitigate those risks. Management reviews and discusses with the Board significant risks identified through this process.

The Audit Committee is responsible for discussing with management major financial risk exposures, our ethics and compliance program and compliance with legal and regulatory requirements. The Board and Audit Committee receive regular updates on our ethics and compliance and cybersecurity programs. In connection with its risk oversight role, the Audit Committee meets regularly with representatives from our independent auditor and with our Chief Financial Officer, Chief Legal and Compliance Officer and the head of our internal audit function. See also pages 6 and 7 addressing the opioid crisis.

Our Ethics and Compliance Program

Our Board has adopted written Standards of Business Conduct that outline our corporate values and standards of integrity and behavior. The Standards of Business Conduct are designed to foster a culture of integrity, drive compliance with legal and regulatory requirements, and protect and promote the reputation of our company. The full text of the Standards of Business Conduct is posted on our website at www.cardinalhealth.com under “About Us — Who we are — Ethics and Compliance.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department.

Our Chief Legal and Compliance Officer has responsibility to implement and maintain an effective ethics and compliance program. He provides quarterly updates on our ethics and compliance program to the Audit Committee and an update to the full Board at least once a year, or more frequently as needed. He reports to the Chairman of the Audit Committee and to the Chief Executive Officer, and meets in separate executive sessions quarterly with the Audit Committee.

Our Board Evaluation Process

Each year, our Board conducts a rigorous self-evaluation process, which includes individual director evaluations. This process is overseen by the Nominating and Governance Committee, led by our independent Lead Director and conducted by an outside facilitator with corporate governance experience. The outside facilitator interviews each director to obtain feedback regarding the Board’s performance and effectiveness, as well as feedback on each director. This feedback, which is compiled anonymously, helps the Board identify follow-up items and provide feedback to management.

The Board evaluation process includes an assessment of both Board process and substance, including:

The outside facilitator also compiles feedback regarding each individual director, which is provided to each director in individual discussion. The Board believes that this annual evaluation process supports its effectiveness and continuous improvement.

Director Independence

The Board has established director independence standards based on the New York Stock Exchange (“NYSE”) rules. These standards can be found in our Corporate Governance Guidelines on our website at www.cardinalhealth.com under “About Us — Corporate — Investor Relations — Corporate Governance — Corporate Governance Documents.” These standards address, among other things, employment and compensation relationships, relationships with our auditor and customer and business relationships.

The Board assesses director independence at least annually, based on the recommendations of the Nominating and Governance Committee. The Board has determined that each of Messrs. Darden, Downey, Jones, Johri, Kenny and King, and each of Mses. Arnold, Cox, Hemingway Hall and Killefer, is independent and that Mr. Anderson, who resigned from the Board in September 2018, was independent after his employment with Alexion ended in August 2017.

In determining that Mr. King is independent, the Nominating and Governance Committee considered that he is Chairman, President and Chief Executive Officer of LabCorp. We sell medical and laboratory products to LabCorp in the ordinary course of business. LabCorp’s payments to us were less than 1% of our, and less than 2% of LabCorp’s, revenue for each of the last three years.

 

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Shareholder Engagement

It has been our long-standing practice to actively engage with our shareholders throughout the year so that management and the Board can better understand shareholder perspectives on governance, executive compensation and other topics. We strive for a collaborative approach to shareholder engagement and value the variety of shareholders’ perspectives. Throughout his tenure, our independent Lead Director, Mr. Kenny, has participated in outreach discussions with shareholders and also has attended and met with investors during a leading healthcare conference. He provides shareholder feedback gathered through these discussions to the Board.

During fiscal 2018, we engaged with governance professionals from our largest shareholders collectively representing approximately 50% of our outstanding shares. We also held constructive discussions with representatives of Investors for Opioid Accountability. Our engagement discussions covered a number of topics including our Board’s leadership, composition and governance practices and the Board’s oversight of strategy and risk and oversight of our response to the opioid crisis.

An overview of our engagement process is below.

 

After considering feedback from shareholders in recent years, we have:

 

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Director Compensation

Overview

Decisions regarding our non-management director compensation program are approved by our Board of Directors based on recommendations of the Compensation Committee. The Compensation Committee receives comparative market data and recommendations from its compensation consultant with regard to the structure and amounts of our non-management director compensation. Total non-management director compensation is targeted at the median amount among our Comparator Group, which is discussed in detail on page 33.

Following the Compensation Committee’s most recent review of non-management director compensation, and based on the recommendation of its compensation consultant, the Compensation Committee recommended to the Board, and the Board approved, increases to the annual retainers and the annual restricted share unit (“RSU”) grants effective in November 2018. The new compensation aligns with median director compensation for the fiscal 2019 Comparator Group, which is described on page 33. Prior to this change, director compensation arrangements were last changed in November 2015.

Compensation Arrangements

The table below shows the elements and amount of compensation that we pay to our non-management directors.

Directors may receive additional compensation for performing duties assigned by the Board or its committees that are considered beyond the scope of the ordinary responsibilities of directors or committee members. During fiscal 2018, the Board approved additional compensation of $10,000 per year for each of Messrs. Darden and Kenny and Ms. Cox for service on the Ad Hoc Committee and $25,000 per year for Mr. Downey for service as the chair of the Ad Hoc Committee.

Directors may elect to defer payment of their cash retainers into the Cardinal Health Deferred Compensation Plan (“DCP”). For directors, deferred balances under the DCP are paid in cash upon termination from Board service, death or disability in a single lump sum or annual installment payments over a period of five or ten years. A director also may defer receipt of common shares that otherwise would be issued on the date that RSUs vest until termination from Board service.

Our directors may participate in our matching gift program. Under this program and subject to certain restrictions, the Cardinal Health Foundation (our philanthropic affiliate) will match contributions for eligible non-profit organizations.

 

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Director Compensation for Fiscal 2018

The non-management directors received the following compensation during fiscal 2018:

Related Person Transactions Policy and Process

Related Person Transactions Policy

The Board follows a written policy that the Audit Committee must approve or ratify any “related person transactions” (transactions exceeding $120,000 in which we are a participant and any related person has a direct or indirect material interest). “Related persons” include our directors, nominees for election as a director, persons controlling over 5% of our common shares, executive officers and the immediate family members of each of these individuals.

Once a related person transaction is identified, the Audit Committee will review all the relevant facts and circumstances and determine whether to approve the transaction. The Audit Committee will take into account such factors as it considers appropriate, including the material terms of the transaction, the nature of the related person’s interest in the transaction, the significance of the transaction to the related person and us, the nature of the related person’s relationship with us and whether the transaction would be likely to impair the judgment of a director or executive officer to act in our best interest.

If advance approval of a transaction is not feasible, the Audit Committee will consider the transaction for ratification at its next regularly scheduled meeting. The Audit Committee Chairman may pre-approve or ratify any related person transactions in which the aggregate amount is expected to be less than $1 million.

Related Person Transactions

Since July 1, 2017, there have been no transactions, and there are no currently proposed transactions, involving an amount exceeding $120,000 in which we were or are to be a participant and in which any related person had or will have a direct or indirect material interest, except as described below.

David J. Anderson, who resigned from the Board in September 2018, served as Chief Financial Officer of Alexion, a biotechnology company, from December 11, 2016 until July 31, 2017, and as an employee of Alexion until August 31, 2017. When Mr. Anderson joined Alexion, we had a preexisting commercial relationship with Alexion, which was negotiated at arm’s length and in the ordinary course of business and which has continued since Mr. Anderson ended his employment with Alexion. From July 1, 2017 through August 31, 2017, we purchased $67 million of Alexion product for distribution to our customers. Mr. Anderson was not involved in any decisions or activities directly associated with the transactions between Alexion and us. These transactions were approved by our Audit Committee in accordance with the Related Person Transactions Policy.

 

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Audit Committee Matters

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of our independent auditor and approves the audit engagement letter with Ernst & Young LLP and its audit fees. The Audit Committee has appointed Ernst & Young LLP as our independent auditor for fiscal 2019 and believes that the continued retention of Ernst & Young LLP as our independent auditor is in the best interest of Cardinal Health and its shareholders. Ernst & Young LLP has served as our independent auditor since 2002. In accordance with SEC rules, lead audit partners are subject to rotation requirements, which limit the number of consecutive years an individual partner may serve us. The Audit Committee oversees the rotation of the audit partners. The Audit Committee Chairman interviews candidates for audit partner and the Audit Committee discusses them.

While not required by law, we are asking our shareholders to ratify the appointment of Ernst & Young LLP as our independent auditor for fiscal 2019 at the Annual Meeting as a matter of good corporate governance. If shareholders do not ratify this appointment, the Audit Committee will consider whether it is appropriate to appoint another audit firm. Even if the appointment is ratified, the Audit Committee in its discretion may appoint a different audit firm at any time during the fiscal year if it determines that such a change would be in the best interest of the company and its shareholders. Our Audit Committee approved, and our shareholders ratified with 98% support, the appointment of Ernst & Young LLP as our independent auditor for fiscal 2018.

We expect representatives of Ernst & Young LLP to be present at the Annual Meeting. They will have an opportunity to make a statement if they desire to do so and to respond to appropriate questions from shareholders.

Audit Committee Report

The Audit Committee is responsible for overseeing: the integrity of Cardinal Health’s financial statements; the independent auditor’s qualifications, independence and performance; Cardinal Health’s internal audit function; Cardinal Health’s ethics and compliance program and its compliance with legal and regulatory requirements; and Cardinal Health’s processes for assessing and managing risk. The Audit Committee currently consists of five members of the Board of Directors. The Board of Directors has determined that each current Committee member is an “audit committee financial expert” for purposes of the SEC rules and is independent. The Audit Committee’s activities are governed by a written charter, which is available on Cardinal Health’s website at www.cardinalhealth.com under “About Us — Corporate — Investor Relations — Corporate Governance — Board Committees and Charters.”

Management has primary responsibility for the financial statements and for establishing and maintaining the system of internal control over financial reporting. Management also is responsible for reporting on the effectiveness of Cardinal Health’s internal control over financial reporting. Cardinal Health’s independent auditor, Ernst & Young LLP, is responsible for performing an independent audit of Cardinal Health’s consolidated financial statements and for issuing a report on the financial statements and a report on the effectiveness of Cardinal Health’s internal control over financial reporting based on its audit.

The Audit Committee reviewed and discussed the audited financial statements for the fiscal year ended June 30, 2018 with management and with Ernst & Young LLP. The Audit Committee also reviewed and discussed with management and Ernst & Young LLP the effectiveness of Cardinal Health’s internal control over financial reporting as well as management’s report and Ernst & Young LLP’s report on the subject. The Audit Committee discussed with Ernst & Young LLP the matters related to the conduct of its audit that are required to be communicated by auditors to audit committees under applicable requirements of the Public Company Accounting Oversight Board (the “PCAOB”) and matters related to Cardinal Health’s financial statements, including critical accounting estimates and judgments. The Audit Committee received from Ernst & Young LLP the written disclosures and letter regarding Ernst & Young LLP’s independence from Cardinal Health required by applicable PCAOB requirements and discussed Ernst & Young LLP’s independence.

 

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The Audit Committee meets regularly with Ernst & Young LLP, with and without management present, to review the overall scope and plans for Ernst & Young LLP’s audit work and to discuss the results of its examinations, the evaluation of Cardinal Health’s internal control over financial reporting and the overall quality of Cardinal Health’s accounting and financial reporting. In addition, the Audit Committee annually considers the performance of Ernst & Young LLP.

In reliance on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements for the fiscal year ended June 30, 2018 be included in Cardinal Health’s Annual Report on Form 10-K for filing with the SEC.

Submitted by the Audit Committee of the Board of Directors on August 20, 2018.

Clayton M. Jones, Chairman
David J. Anderson⁽¹⁾
Bruce L. Downey
Patricia A. Hemingway Hall
Akhil Johri

Fees Paid to Ernst & Young LLP

The following table sets forth the fees billed to us by Ernst & Young LLP for services in fiscal 2018 and 2017.

Policy on Pre-Approval of Services Provided by Ernst & Young LLP

The Audit Committee must pre-approve the audit and permissible non-audit services performed by our independent accountants in order to help ensure that the accountants remain independent from Cardinal Health. The Audit Committee has adopted a policy governing this pre-approval process.

Under the policy, the Audit Committee annually pre-approves certain services and assigns specific dollar thresholds for these types of services. If a proposed service is not included in the annual pre-approval, the Audit Committee must separately pre-approve the service before the engagement begins.

The Audit Committee has delegated pre-approval authority to the Audit Committee Chairman for proposed services up to $500,000. Proposed services exceeding $500,000 require full Audit Committee approval.

All audit and non-audit services provided for us by Ernst & Young LLP for fiscal 2018 and 2017 were pre-approved by the Audit Committee.

 

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Executive Compensation

In accordance with Section 14A of the Securities Exchange Act of 1934 (the “Exchange Act”), we are asking our shareholders to approve, on a non-binding advisory basis, the compensation of our named executive officers, as disclosed in the Compensation Discussion and Analysis, the Summary Compensation Table and the related compensation tables, notes and narrative in this proxy statement.

We urge shareholders to read the Compensation Discussion and Analysis beginning on the next page of this proxy statement, which describes in more detail how our executive compensation program operates and is designed to achieve our compensation objectives, as well as the Summary Compensation Table and related compensation tables, notes and narrative appearing on pages 35 through 47, which provide detailed information on the compensation of our named executive officers.

Although this advisory vote is not binding on the Board, the Board and the Compensation Committee will review and consider the voting results when evaluating our executive compensation program.

The Board has adopted a policy providing for annual say-on-pay advisory votes. Accordingly, the next say-on-pay advisory vote will be held at our 2019 Annual Meeting of Shareholders.

 

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Compensation Discussion and Analysis

Executive Summary

This Compensation Discussion and Analysis focuses on the compensation of the following current and former executive officers (the “named executive officers” or “named executives”) for fiscal 2018 and describes the executive compensation program and the Compensation Committee’s decisions under it.

Fiscal 2018 Highlights

In fiscal 2018, we positioned the company for future growth, making a number of changes. In November 2017, we announced our succession plans for Chief Executive Officer and Chief Financial Officer, followed by other senior leadership changes later in the fiscal year. These transitions have gone very well.

The following are fiscal 2018 performance highlights:

To establish a foundation for future growth, we initiated a comprehensive review of our business focused on our portfolio, cost structure and capital deployment. Fiscal 2018 accomplishments and future areas of focus include:

See Annex A for the reasons why we use non-GAAP financial measures and reconciliations to the comparable GAAP financial measures.

 

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Results of 2017 Advisory Vote to Approve Executive Compensation and Shareholder Engagement

At the 2017 Annual Meeting of Shareholders, our say-on-pay advisory vote received 96% support, our sixth straight year of over 90% shareholder support. The Compensation Committee considered this vote — as well as shareholder feedback from our shareholder engagement — as demonstrating strong support for our executive compensation program and maintained the structure of our executive compensation program when making compensation decisions for fiscal 2018.

It has been our long-standing practice to actively engage with our shareholders throughout the year so that management and the Board can better understand shareholder perspectives on topics like executive compensation. During fiscal 2018, we engaged with governance professionals from our largest shareholders collectively representing approximately 50% of our outstanding shares. (See page 21 for further detail about shareholder engagement.)

Compensation Philosophy and Practices

Our compensation program is designed to support our long-term growth, with accountability for key annual results. It has the following key objectives:

Executive Compensation Governance Features

 

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Elements of Fiscal 2018 Compensation for Executive Officers

We have three elements of total direct compensation: base salary, annual incentives and long-term incentives. For fiscal 2018, long-term incentives consisted of an equally-weighted mix of performance share units (“PSUs”), stock options and RSUs. A significant portion of executive compensation was performance-based and at-risk (annual incentives, PSUs and stock options). As discussed below, at the beginning of each fiscal year, the Compensation Committee sets performance goals under our annual incentive plan and PSUs. After the performance period, the Compensation Committee evaluates actual performance and determines payouts.

Pay Element	Description and Purpose	Links to Business and Talent Strategies
Base salary	•  Fixed cash compensation, which is reviewed annually and adjusted when appropriate •  Set based on qualifications, experience, role, performance in the role, career progression, market data and internal pay equity	•  Competitive base salaries support our ability to attract and retain executive talent
Annual incentives	•  Variable cash compensation based on achieving annual financial goals and operational and individual performance •  Target as a percentage of base salary reflects market data and internal pay equity	•  Primary financial measure reflects our focus on operating earnings, with tangible capital modifier promoting efficient use of capital •  Executives are assessed on their individual performance and the alignment of their behavior with our Standards of Business Conduct, values and leadership essentials, balancing the “what” and the “how” of individual performance
Long-term incentives	•  Equally weighted between PSUs, stock options and RSUs •  PSUs vest based on achieving non-GAAP EPS goals over three years, subject to a total shareholder return (“TSR”) modifier; stock options and RSUs vest ratably over three years •  Target annual grant value reflects market data and internal pay equity	•  Supports sustainable long-term shareholder return and closely aligns management’s interests with shareholders’ interests •  PSU performance measure is a primary measure for evaluating our performance and is closely followed by the investment community •  Long-term incentives retain executive talent and promote focus on stock price appreciation

Base Salary

In connection with Mr. Kaufmann’s appointment to Chief Executive Officer, Mr. Gomez’s appointment to Chief Financial Officer and Mr. Giacomin’s appointment to Chief Executive Officer — Medical Segment, the Compensation Committee set their base salaries at $1,150,000, $550,000 and $775,000, respectively. At the beginning of fiscal 2018, the Compensation Committee increased each of the named executives’ base salaries between 2% and 6%.

 

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Annual Incentive Compensation

Fiscal 2018 Goal Setting and Results

At the beginning of fiscal 2018, the Compensation Committee set the annual incentive target, which called for us to achieve the Board-approved budget of 2.9% non-GAAP operating earnings growth for a 100% payout. As in past years, the Compensation Committee set the fiscal 2018 earnings goal based on non-GAAP operating earnings — one of our primary measures of operating performance. Once we achieve the threshold earnings performance, tangible capital management continues to be a modifier because it focuses on the efficient use of capital. We describe how we calculate these measures under “Annual Cash Incentive and PSU Performance Measure Calculations” on page 40.

Fiscal 2018 Annual Incentive Targets and Payouts

The Compensation Committee annually reviews our named executives’ annual incentive targets as a percentage of base salary. At the beginning of fiscal 2018, the Committee determined to maintain our named executives’ targets as a percentage of base salary at the same levels as fiscal 2017. The Compensation Committee set the targets for Messrs. Kaufmann and Gomez at 150% and 100% of their respective base salaries (the same percentages as their predecessors) effective January 1, 2018 in connection with the appointment to their new roles. Prior to becoming Chief Executive Officer, Mr. Kaufmann’s target was 100%.

Mr. Kaufmann’s annual incentive was based on his successful transition into the Chief Executive Officer role, including his strong efforts in establishing and leading an executive team with new finance and Medical segment leaders. He also was instrumental in launching the comprehensive review of our business and its initial workstreams. His final incentive award reflects his target as Chief Financial Officer during the first half of the fiscal year and as Chief Executive Officer during the second half.

Mr. Barrett’s annual incentive was based on enterprise performance, as well as the successful transition of the Chief Executive Officer role to Mr. Kaufmann and Mr. Barrett’s advocacy work on healthcare policy.

Mr. Gomez’s annual incentive was based on his successful transition into the Chief Financial Officer role and his efforts in building out his finance leadership team with critical talent. He also assumed a key leadership role in our comprehensive business review. His final incentive award reflects his target as Chief Financial Officer — Medical Segment and that segment’s performance during the first half of the fiscal year, and his target as Chief Financial Officer and enterprise performance during the second half.

Mr. Giacomin’s annual incentive was based on his efforts toward the successful divestiture of our China distribution business, which he led, as well as his strong transition into his new role leading our Medical segment. In that role, he installed new segment leaders and was instrumental in overseeing the initial action steps taken to stabilize the Cordis business.

Mr. Morford’s annual incentive was based on his continued strong leadership of our overall legal and compliance programs in a rapidly evolving landscape, as well as his efforts overseeing the legal and compliance aspects of the Patient Recovery business integration and his work on the successful leadership transitions.

Ms. Morrison’s annual incentive was based on enterprise performance, as well as her efforts in leading the project to integrate systems within the recently-acquired Patient Recovery business.

Mr. Casey departed from the company in February 2018 and did not receive an annual incentive payout.

 

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Long-Term Incentive Compensation

For fiscal 2018, we equally weighted our long-term incentive grants between PSUs, stock options and RSUs. We may adjust annual grants from target to reflect individual performance, retention or succession planning. As discussed later in this section, we made changes to our long-term incentive mix for the fiscal 2019 annual grant.

Fiscal 2016-2018 PSU Payouts

We had no payout of the PSUs granted for the fiscal 2016 through fiscal 2018 performance cycle (the “Fiscal 16-18 PSUs”). Actual performance in non-GAAP EPS compound annual growth rate (“CAGR”), excluding the benefits of U.S. tax reform, and average annual dividend yield was 3.1%, below the threshold performance of 7.0% required for a payout.

The following table shows the target and earned Fiscal 16-18 PSUs for our named executives other than Mr. Gomez and Ms. Morrison, who were not named executives when these grants were made, but also earned no shares.

Fiscal 2018 Long-Term Incentive Grants

Fiscal 2018-2020 PSU Grants

When granting PSUs for the fiscal 2018 through fiscal 2020 performance cycle (the “Fiscal 18-20 PSUs”), the Compensation Committee made a change to payouts in each of three annual periods and added a modifier based on TSR relative to the Standard & Poor’s (“S&P”) 500 Healthcare Index. A payout level between 50% and 200% is earned for each annual period based on achieving non-GAAP EPS of $4.70 at threshold, $5.00 at target and $5.30 at maximum for the first year and pre-established growth goals over the prior fiscal year’s non-GAAP EPS for the second and third years. The TSR modifier is then applied to the three-year average payout level, which decreases the payout by 20% if TSR is below the 20th percentile of the peer group and increases it by 20% if TSR is above the 80th percentile of the peer group.

The Compensation Committee aligned the non-GAAP EPS target for the first year of the Fiscal 18-20 PSUs with the Board-approved budget and has indicated that it intends to exclude the benefits of U.S. tax reform when evaluating fiscal 2018 performance for the named executives’ awards, resulting in below-threshold performance. The Compensation Committee believes that the earnings growth measures for the second and third years provide very challenging goals.

The Compensation Committee retained non-GAAP EPS as the primary performance measure because it is one of our primary measures of operating performance and is an important measure used by the investment community to evaluate our performance. The Compensation Committee adopted the change to payouts in each of three annual periods to better address significant industry-wide challenges and uncertainties.

The Compensation Committee added a relative TSR modifier based on its goal of linking a portion of long-term incentive compensation directly to relative shareholder returns, a recommendation by its consultant and feedback from shareholders. The Compensation Committee selected the S&P 500 Healthcare Index as the peer group because it is an objective, widely available index with broad representation in the healthcare sector.

 

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We describe how we calculate these measures in more detail under “Annual Cash Incentive and PSU Performance Measure Calculations” on page 40. We do not disclose the non-GAAP EPS goals for the second and third annual periods of the Fiscal 18-20 PSUs because it is competitively sensitive information. We will disclose the goals after the end of the three-year performance period.

Fiscal 2019 Program Change

As part of its annual review of our long-term incentive program, the Compensation Committee changed our long-term incentive mix for the fiscal 2019 annual grant, increasing the proportion of PSUs to 60% and eliminating stock options for named executives. The Compensation Committee made the decision after considering factors such as market data, emerging best practices, incentive and retentive value of awards, the recommendation of its compensation consultant and shareholder feedback.

Other Elements of Compensation

401(k) Savings and Deferred Compensation Plans

Our 401(k) Savings Plan and DCP allow most of our employees based in the United States to accumulate value on a tax-deferred basis and to be competitive in recruiting and retaining talent. Our DCP permits certain management employees, including the named executives, to defer payment and taxation of a portion of their salary and annual incentive compensation into a variety of different investment alternatives. We make matching contributions subject to limits discussed under “Deferred Compensation” on page 43. We also may make additional contributions to the 401(k) Savings Plan and DCP on the same basis for all employees. Named executives also may elect to defer payment and taxation of PSUs and RSUs.

Other Benefits and Perquisites

The Compensation Committee encourages use of our corporate aircraft for the personal travel of our Chief Executive Officer and Executive Chairman of the Board as it increases the time available for business purposes and enhances safety and security. The Compensation Committee has set each of Messrs. Kaufmann and Barrett’s personal travel allowance at $150,000 per fiscal year. They do not receive tax reimbursement for any imputed income associated with personal travel. Both Messrs. Kaufmann and Barrett have an aircraft time-sharing agreement, under which they may reimburse us for incremental costs when they use the aircraft for personal travel. Reimbursed travel does not count against their allowances.

Severance and Change of Control Benefits

We discuss our limited severance payments and benefits in detail under “Potential Payments on Termination of Employment or Change of Control” beginning on page 45. We do not have any agreements to provide change-of-control excise tax gross-ups.

Mr. Casey, our former Chief Executive Officer — Medical Segment, left the company in February 2018. He did not receive severance and was not retirement-eligible upon his departure. Accordingly, he did not receive a fiscal 2018 annual incentive payout and forfeited his unvested long-term incentive awards.

The Board, upon the recommendation of the Compensation Committee, adopted a Senior Executive Severance Plan (the “Severance Plan”), which plan will be effective as of October 1, 2018 and under which our named executives (other than Mr. Barrett) will be eligible for severance benefits under certain circumstances. Under the Severance Plan,

then, the named executive will receive:

Receipt of these amounts is conditioned upon execution of a general release and compliance with certain restrictive covenants.

We believe that the Severance Plan is competitive with market practices and provides appropriate levels of compensation and terms and conditions related to executive separations. These benefits are an important component of our compensation packages designed to attract and retain top caliber talent in senior leadership roles and define terms and conditions of separation events. The Compensation Committee consulted with its compensation consultant before recommending the Severance Plan to the Board.

Retirement Benefits

At retirement, Mr. Barrett, like other company retirees, will be eligible for a prorated fiscal 2019 annual incentive award, prorated vesting of his long-term incentive awards and continued exercisability of vested stock options for their full term.

 

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To ensure an orderly transition of Ms. Morrison’s responsibilities, we amended her long-term incentive awards to provide that upon her retirement in August 2018, she received prorated vesting of awards and continued exercisability of vested stock options for their full term, in both cases consistent with benefits that would be provided to retirees under the 2011 LTIP.

Our Policies, Guidelines and Practices Related to Executive Compensation

Role of Compensation Committee’s Compensation Consultant

The Compensation Committee engaged Korn Ferry Hay Group, Inc. (“Hay Group”) as its independent executive compensation consultant in February 2018. Prior to that, it had retained Frederic W. Cook & Co., Inc. (“Cook”) as its consultant during fiscal 2018.

The nature and scope of the consultant’s engagement consists primarily of:

Early in fiscal 2018, Cook advised the Compensation Committee on compensation decisions made for fiscal 2018 with respect to base salaries and annual long-term incentive awards. Hay Group advised the Compensation Committee with respect to fiscal 2018 annual incentive payouts. The Compensation Committee made assessments of its compensation consultants under factors set forth in NYSE rules and concluded that each of Hay Group and Cook was independent and that the firms’ work for the Compensation Committee did not raise any conflicts of interest.

Role of Executive Officers

Our Chief Executive Officer and Chief Human Resources Officer participate in Compensation Committee meetings to make recommendations regarding design and compensation amounts, to present performance assessments of the named executives (other than our Chief Executive Officer and Executive Chairman of the Board) and to discuss our financial and operational performance. The Compensation Committee delegates to our executive officers authority to administer equity and incentive compensation plans for participants who are not officers subject to Section 16 of the Exchange Act.

Our Chief Executive Officer reviews performance objectives with the Compensation Committee at the beginning of the fiscal year. At the end of the fiscal year, the Compensation Committee reviews and discusses the performance and compensation of the Chief Executive Officer in executive session and with the Lead Director. The Chief Executive Officer does not participate in decisions regarding his own compensation.

Comparator Group

The Compensation Committee establishes target compensation levels based on a variety of factors, including data from a “Comparator Group” of similarly situated public companies, which helps the Compensation Committee to assess whether our executive pay remains reasonable and competitive in the marketplace. Developed with the assistance of the Compensation Committee’s compensation consultant, our Comparator Group reflects the industry in which we primarily compete for executive talent and includes direct competitors and other companies in the healthcare field. Our Comparator Group also includes air/freight and logistics companies because of their similar business models.

The following companies comprised the Comparator Group for fiscal 2018 executive pay decisions:

The Compensation Committee, working with its compensation consultant, periodically reviews the group’s composition to ensure that the companies remain relevant for comparison purposes. The Compensation Committee used the following screening criteria when it reviewed the Comparator Group’s composition prior to fiscal 2018:

At the time of the review, our revenue was in the top quintile of the Comparator Group, while our market capitalization was in the fourth quintile.

Our Compensation Committee compares total direct compensation (base salary plus annual and long-term incentives) against the 50th percentile of the Comparator Group as a reference point in setting target compensation levels. In addition to competitive market data, the Compensation Committee also considers internal pay equity and an executive’s experience and scope of responsibility, individual performance, potential and unique or hard-to-replace skills, as well as retention considerations.

In May 2018, the Compensation Committee again reviewed the Comparator Group’s composition with the assistance of Hay Group and, after considering various factors, made several changes effective for fiscal 2019. The Compensation Committee added Abbott Laboratories, Danaher, Johnson & Johnson, Medtronic and Stryker to better reflect our investments in the Medical segment, including Cordis and the Patient Recovery business, and added Kroger and Target as companies generally similar in size to us and operating in related businesses. It removed Aetna and Express Scripts, which are being acquired, and also removed Humana and Quest Diagnostics.

 

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Risk Assessment of Compensation Programs

Management has assessed our compensation programs and concluded that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on Cardinal Health. This risk assessment included reviewing the design and operation of our compensation programs, identifying and evaluating situations or compensation elements that could raise more significant risks and evaluating other controls and processes designed to identify and manage risk. The Compensation Committee reviewed and discussed the risk assessment and Hay Group reviewed the risk assessment and concurred with management’s conclusion.

Stock Ownership Guidelines

We have stock ownership guidelines to align the interests of executive officers and directors with the interests of our shareholders. The guidelines specify a dollar value (expressed as a multiple of salary or cash retainer) of shares that executive officers and directors must accumulate and hold while serving in these positions.

We count common shares, RSUs and phantom shares held through the DCP under the stock ownership guidelines. Executive officers and directors must retain 100% of the net after-tax shares received under any equity awards until they satisfy the required ownership levels.

Potential Impact on Compensation from Executive Misconduct (“Clawbacks”)

Our incentive plan and equity award agreements provide that we may require repayment of cash incentives and gains realized under equity awards and cancel outstanding equity awards in specified instances of executive misconduct, including a material violation of law or of our Standards of Business Conduct that causes material financial harm to us.

We will disclose publicly the incentive compensation forfeitures or repayments from our executive officers if required by law or if we have already disclosed publicly the underlying event triggering the forfeiture or repayment and the disclosure would not violate any individual’s privacy rights, is not likely to result in or exacerbate any existing or threatened employee, shareholder or other litigation, arbitration, investigation or proceeding against us and is not otherwise prohibited.

We discuss these provisions in more detail under “Potential Impact on Compensation from Executive Misconduct (“Clawbacks”)” on page 40.

Hedging and Pledging Shares

Our Board has adopted a policy prohibiting all employees and directors from entering into short sales, publicly traded options, puts and calls, forward sale contracts and other swap, hedging or derivative transactions relating to our securities. The Board also has adopted a policy prohibiting our executive officers and directors from holding our securities in margin accounts or pledging our securities as collateral for a loan.

Equity Grant Practices

The Compensation Committee typically approves the annual equity grant in August of each year and sets August 15 as the grant date. The Compensation Committee expects the annual grant date to follow the release of earnings for the prior fiscal year in early August, without regard to whether we are aware of material nonpublic information.

Equity Dilution Practices

Our fiscal 2018 annual equity run rate was 1.1%. We calculate our equity run rate as the total number of shares subject to equity awards granted in the fiscal year divided by the weighted average number of our common shares outstanding during the fiscal year.

Tax Matters

Section 162(m) of the Internal Revenue Code (“Code”) limits our ability to take a tax deduction for non-performance-based compensation in excess of $1 million paid in fiscal 2018 to our Chief Executive Officer and three other most highly compensated executive officers (other than the Chief Financial Officer). “Performance-based” compensation was excepted from this limit, so we generally structured our incentive compensation arrangements in a manner intended to comply with these tax rules. The Compensation Committee has, however, always maintained the flexibility to pay nondeductible incentive compensation as it determines in its business judgment.

Human Resources and Compensation Committee Report

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on that review and discussion, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in Cardinal Health’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

Submitted by the Human Resources and Compensation Committee of the Board.

David P. King, Chairman
Carrie S. Cox
Calvin Darden
Nancy Killefer

 

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Executive Compensation Tables

The table below summarizes fiscal 2018 compensation for:

Summary Compensation Table

 

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The amounts shown for “All Other Compensation” for fiscal 2018 include: company contributions to the named executive’s account under our 401(k) plan; company contributions to the named executive’s account under our DCP; and perquisites, in the following amounts:

Employment Arrangements

Mr. Barrett is the only executive officer with an employment agreement. Prior to November 2017, Mr. Barrett’s employment agreement provided that he would serve as Chairman and Chief Executive Officer until our 2018 Annual Meeting of Shareholders, subject to earlier termination. In November 2017, as part of the succession plans described above, we modified Mr. Barrett’s employment agreement to provide that he will continue to serve as Executive Chairman of the Board until the 2018 Annual Meeting of Shareholders, at which time he will retire from Cardinal Health.

The modified agreement provides that Mr. Barrett will continue to receive the same level of compensation through the date of his retirement. He will receive medical and dental benefits for two years after retirement. He also will receive retirement treatment under our 2011 LTIP, which provides for a prorated fiscal 2019 annual bonus, prorated vesting of his outstanding long-term incentive awards and continued exercisability of vested stock options for their full term.

In connection with Ms. Morrison’s retirement in August 2018, we entered into a letter agreement with her that provided for prorated vesting of outstanding long-term incentive awards and continued exercisability of vested stock options for their full term, in both cases consistent with the benefits that would be provided to retirees under the 2011 LTIP.

 

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Grants of Plan-Based Awards for Fiscal 2018

The table below supplements our Summary Compensation Table by providing additional information about our plan-based compensation for fiscal 2018.

 

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2011 Long-Term Incentive Plan

Our key executive employees, including our named executives, are eligible to receive annual cash incentives under our 2011 LTIP. For fiscal 2018, the Compensation Committee established the “qualifying performance criterion” of $900 million in non-GAAP operating earnings. This qualifying performance criterion was intended to allow payments to qualify as performance-based compensation under Section 162(m) of the Code and to be fully tax-deductible by us. The named executives would not have received any payout under the 2011 LTIP unless we achieved this threshold.

As discussed in the Compensation Discussion and Analysis, the Compensation Committee also set a “performance goal” of adjusted non-GAAP operating earnings and established a matrix of potential funding percentages based upon achievement of varying levels of earnings, subject to adjustment based on tangible capital performance. The funding percentage determines the total pool for annual incentive awards. The performance goals established by the Compensation Committee may vary from year to year, and the Compensation Committee retains discretion to make annual incentive awards to named executives even if we do not achieve the minimum performance goal.

Under our 2011 LTIP, we also may grant stock options, stock appreciation rights, stock awards and other stock-based awards to employees. During fiscal 2018, we granted PSUs, nonqualified stock options and RSUs under the plan to our named executives, as shown in the Grants of Plan-Based Awards for Fiscal 2018 table on pages 37 and 38. The plan provides for “double-trigger” accelerated vesting in connection with a change of control, under which the vesting of awards will accelerate only if there is a qualifying termination within two years after the change of control or if the surviving entity does not provide qualifying replacement awards.

During fiscal 2018, we added one-year minimum vesting provisions to our 2011 LTIP. Under these provisions, stock options and stock awards are subject to a one-year vesting condition, except upon a change of control or the death or disability of the grantee or for up to an aggregate not to exceed 5% of the total number of shares provided for in the 2011 LTIP.

PSUs granted under the 2011 LTIP settle after a performance period by the issuance of shares, which may be a fraction or multiple of the target number of PSUs subject to an award. Issuance of the shares is subject to both continued employment and the achievement of performance goals established by the Compensation Committee (which may vary from award to award).

For the Fiscal 18-20 PSUs, the Compensation Committee established the “qualifying performance criterion” of non-GAAP EPS for our fiscal year ending June 30, 2020 equal to or greater than $1.00 per share. This qualifying performance criterion was intended to allow the PSUs to be performance-based compensation under Section 162(m) of the Code and to be fully tax-deductible by us.

As discussed in the Compensation Discussion and Analysis, the Compensation Committee also established a “performance goal” for the Fiscal 18-20 PSUs based on payout levels of non-GAAP EPS in each of three annual periods, with a modifier based on TSR relative to the S&P 500 Healthcare Index. A participant can receive 50% of target PSUs if we attain threshold performance and up to 200% of target PSUs for over-performance before the 20% TSR modifier is applied.

We describe how we calculate the measures referred to in this section under “Annual Cash Incentive and PSU Performance Measure Calculations” below.

 

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Annual Cash Incentive and PSU Performance Measure Calculations

In addition to determining incentive compensation, we use the non-GAAP financial measures referenced above internally to evaluate our performance, evaluate the balance sheet, and engage in financial and operational planning because we believe that these measures provide additional perspective on and, in some circumstances are more closely correlated to, the performance of our underlying, ongoing business. We provide these non-GAAP financial measures to investors as supplemental metrics to assist readers in assessing the effects of items and events on our financial and operating results on a year-over-year basis and in comparing our performance to that of our competitors.

Potential Impact on Compensation from Executive Misconduct (“Clawbacks”)

The 2011 LTIP authorizes us to seek repayment of incentive awards from a participant if that participant engages in misconduct that causes or contributes to the need to restate previously-filed financial statements and the payment was based on financial results that we subsequently restate. In addition, incentive awards granted under the 2011 LTIP may be subject to repayment if a participant commits misconduct, including a breach of our Standards of Business Conduct or violation of an applicable non-competition or confidentiality agreement.

Under our stock option, PSU and RSU agreements, unexercised stock options, unvested PSUs and RSUs and certain vested PSUs and RSUs are forfeited if the holder breaches our Standards of Business Conduct, discloses confidential information, commits fraud, gross negligence or willful misconduct, solicits business or our employees, disparages us or engages in competitive actions while employed by Cardinal Health or during a set time period after termination of employment. We also may require the holder to repay the gross gain realized from any stock option exercises or the value of the PSUs and RSUs settled within a set time period prior to such conduct.

 

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Outstanding Equity Awards at Fiscal Year-End for Fiscal 2018

The table below shows the number of shares underlying exercisable and unexercisable stock options and unvested PSUs and RSUs held by our named executives on June 30, 2018. Mr. Casey departed from the company in February 2018 and had no outstanding equity awards to report in the table.

 

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Option Exercises and Stock Vested for Fiscal 2018

The table below shows stock options that were exercised, and PSUs and RSUs that vested, during fiscal 2018 for each of our named executives.

Deferred Compensation

Our DCP permits certain management employees, including the named executives, to defer between 1% and 50% of base salary and between 1% and 80% of incentive compensation. In addition, we may make additional matching and non-matching contributions to the deferred balances of participants. We make matching contributions on amounts deferred under the DCP from compensation in excess of $275,000, but not in excess of $375,000, at the same rate as contributions are matched under the 401(k) Savings Plan. We also may credit participants’ accounts with additional company contributions in the same amount as company contributions made to the 401(k) Savings Plan based on a percentage of fiscal year compensation in excess of $275,000, but not in excess of $375,000.

Each participant may direct the investment of his or her DCP account by selecting notional investment options that generally track publicly available mutual funds and investments and by periodically changing investment elections as the participant deems appropriate. We pay participants’ deferred balances in cash upon retirement, termination from employment, death or total disability in a single lump sum or annual installment payments over a period of five or ten years. The DCP does not qualify under Section 401(a) of the Code and is exempt from many of the provisions of the Employee Retirement Income Security Act of 1974 as a “top hat” plan for a select group of management or highly compensated employees.

Apart from the DCP, a named executive also may defer receipt of shares that otherwise would be issued on the date that PSUs and RSUs vest until after the named executive is no longer employed by Cardinal Health or until a fixed future date.

 

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Nonqualified Deferred Compensation in Fiscal 2018

The table below provides information regarding the named executives’ accounts under our DCP and deferred share arrangements. References to deferred shares in the table below include both PSUs and RSUs.

 

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Potential Payments on Termination of Employment or Change of Control

In many cases, our named executives are eligible to receive benefits after a termination of employment or change of control under the 2011 LTIP. The various payments and benefits that would be provided to the named executives under the 2011 LTIP are discussed in the table below.

Mr. Barrett’s employment agreement, and Messrs. Kaufmann, Gomez, Giacomin and Casey’s and Ms. Morrison’s confidentiality and business protection agreements, contain non-competition and non-solicitation provisions that, among other things, prohibit these executives from being employed by certain entities that compete with us for a period of two years after termination of employment (the “Restricted Period”). During the Restricted Period, these executives also are prohibited from soliciting on behalf of a competitor the business of any customer or any known potential

 

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customer of Cardinal Health. These agreements also prohibit disclosure of confidential information, disparagement and recruitment of our employees.

See also “Potential Impact on Compensation from Executive Misconduct (“Clawbacks”)” at page 40 for a discussion of restrictive covenants under the 2011 LTIP applicable to each of the named executives.

New Severance Plan

The Board, upon the recommendation of the Compensation Committee, adopted the Severance Plan, which plan will be effective as of October 1, 2018 and under which our named executives (other than Mr. Barrett) will be eligible for severance benefits under certain circumstances. Under the Severance Plan,

then, the named executive will receive:

Receipt of these amounts is conditioned upon execution of a general release and compliance with certain restrictive covenants, including non-competition and non-solicitation covenants that apply for two years following termination.

Table for Named Executives

The table below presents the potential payments and benefits in the event of termination of employment or a change of control for each of the named executives other than Mr. Casey. These potential amounts have been calculated as if the named executive’s employment had terminated or a change of control had occurred as of June 30, 2018, the last day of fiscal 2018, and using the closing market price of our common shares on June 29, 2018 ($48.83), the last trading day in fiscal 2018.

The table does not include benefits that are available to all of our salaried employees upon retirement, death or disability, including 401(k) Savings Plan distributions, group and supplemental life insurance benefits and short-term and long-term disability benefits. The amounts reported in the table below are hypothetical amounts. Actual payments will depend on the circumstances and timing of any termination of employment or change of control. The table does not include any benefits that would be payable under the Severance Plan, which will become effective on October 1, 2018.

As discussed above, Mr. Casey, our former Chief Executive Officer — Medical Segment, left the company in February 2018. He did not receive severance and was not retirement-eligible upon his departure. In November 2017, as part of the succession plans described above, we modified Mr. Barrett’s employment agreement to provide that he will continue to serve as Executive Chairman of the Board until the Annual Meeting, at which time he will retire. Ms. Morrison retired in August 2018.

 

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Pay Ratio Disclosure

The Dodd-Frank Wall Street Reform and Consumer Protection Act and SEC rules require us to provide the ratio of the annual total compensation of Mr. Kaufmann, our Chief Executive Officer since January 1, 2018, to the annual total compensation of our median employee.

For fiscal 2018, the median annual total compensation of all employees of the company (other than the Chief Executive Officer) was $51,434. Mr. Kaufmann’s annual total compensation for fiscal 2018 for purposes of the pay ratio disclosure was $11,356,917. Based on this information, for fiscal 2018, the ratio of the compensation of the Chief Executive Officer to the median annual total compensation of all other employees was estimated to be 221 to 1.

To identify and determine the annual total compensation of the median employee, we collected the payroll data of all employees globally as of April 1, 2018 and used total base pay as of April 1, 2018 as our compensation measure, which we consistently applied to all employees.

Using this methodology, we determined that the median employee was a non-exempt, full-time employee located in the United States. The annual total compensation was calculated in accordance with the SEC rules applicable to the Summary Compensation Table and also includes the company-paid portion of health insurance premiums, which are not required to be included in the Summary Compensation Table.

Mr. Kaufmann served as Chief Executive Officer on April 1, 2018, the determination date of the median employee. Because Mr. Kaufmann did not serve as the Chief Executive Officer for the entirety of fiscal 2018, we elected to annualize his base salary and annual cash incentive award for purposes of the pay ratio disclosure as if he were the Chief Executive Officer for the full fiscal year. We also elected to present Mr. Kaufmann’s long-term incentive grants based on the target value set by the Compensation Committee in November 2017 in connection with his appointment to Chief Executive Officer. As a result of these adjustments and the inclusion of the company-paid portion of health insurance premiums, for purposes of the pay ratio disclosure, Mr. Kaufmann’s annual total compensation of $11,356,917 for fiscal 2018 differs from the amount of $8,423,580 reported for Mr. Kaufmann in the fiscal 2018 Summary Compensation Table (see page 35).

The pay ratio disclosure presented above is a reasonable estimate calculated in a manner consistent with SEC rules. Because the SEC rules for identifying the median employee and calculating the pay ratio allow companies to use different methodologies, exclusions, estimates and assumptions that reflect their employee populations and compensation practices, the pay ratio disclosure of other companies may not be comparable to the pay ratio reported by us.

 

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Shareholder Proposals

We received notice that The International Brotherhood of Teamsters General Fund, 25 Louisiana Avenue, NW, Washington, DC 20001, a shareholder owning 75 of our common shares as of May 23, 2018, and Rhode Island Employees’ Retirement Systems Pooled Trust, State House - Room 102, Providence, RI 02903, a shareholder owning 8,749 of our common shares as of May 23, 2018, intend to jointly present the following proposal at the Annual Meeting. The proposed resolution and its supporting statement, for which neither we nor the Board accepts responsibility, are set forth below.

The shareholder proposal and supporting statement read as follows:

RESOLVED, that shareholders of Cardinal Health, Inc. (“Cardinal”) urge the Board of Directors to adopt a policy that no financial performance metric shall be adjusted to exclude legal or compliance costs when evaluating performance for purposes of determining the amount or vesting of any senior executive compensation award. “Legal or compliance costs” are expenses or charges associated with any investigation, litigation or enforcement action related to drug distribution, including legal fees; amounts paid in fines; penalties or damages; and, amounts paid in connection with monitoring required by any settlement or judgment of claims of the kind described above. “Incentive Compensation” is compensation paid pursuant to short-term and long-term incentive compensation plans and programs. The policy should be implemented in a way that does not violate any existing contractual obligation of the Company or the terms of any compensation or benefit plan.

SUPPORTING STATEMENT: As Cardinal shareholders, we support compensation arrangements that incentivize senior executives to drive growth while safeguarding company operations and reputation over the long-term. Cardinal adjusts certain financial metrics when calculating progress on goals for the purposes of awarding incentive compensation. While some adjustments may be appropriate, we believe senior executives should not be insulated from legal risks.

President Trump has recently declared the opioid epidemic a public health emergency. According to page 28 of the Company’s Q3 Fiscal 2018 10-Q, the company faces “hundreds of lawsuits” relating to the distribution of prescription opioids. In addition, 39 state attorney generals have formed a multi-state task force to investigate the role of distributors, such as Cardinal, in the opioid epidemic. In December 2016, Cardinal agreed to pay $44 million to resolve allegations it violated the federal Controlled Substances Act regarding the distribution of opioids. This settlement with the Department of Justice follows a $34 million penalty in 2008 for similar violations.

We believe the opioid emergency presents a heightened level of risk for Cardinal investors. We also believe Cardinal is well positioned to incentivize senior executives to mitigate these risks by ensuring their compensation is tied to effective management of this crisis. As it is structured now, Cardinal may insulate senior executives from legal risks by removing associated costs from the metrics that determine their incentive compensation.

According to the 2017 proxy statement, Cardinal uses non-GAAP operating earnings and non-GAAP diluted EPS in its annual incentive and performance share units, respectively. In both cases, the metrics are calculated to exclude litigation charges.

We believe a superior approach to aligning executive pay with the company’s performance would be to include legal and compliance costs, particularly those associated with opioid litigation.

We urge shareholders to vote for this proposal.

The Board of Directors’ Statement in Opposition to Proposal 4

The Board recommends a vote AGAINST Proposal 4, because it would impose a broad and unnecessary restriction on the Compensation Committee’s decisions regarding the metrics and adjustments used in incentive programs to further corporate strategy and promote long-term shareholder value creation.

Broad and indiscriminate restriction. The proposal would require that, when setting senior executive compensation, the Compensation Committee not adjust any financial performance metric for costs encompassed by the proposal’s broadly defined notion of “legal or compliance costs . . . related to drug distribution.” By imposing a flat prohibition, the proposal would prevent consideration of factors such as whether we prevailed in any covered litigation or whether, given our business as a pharmaceutical wholesale distributor, litigation “related to drug distribution” involved an ordinary course business dispute with one of our suppliers or customers. As such, we believe this type of broad and indiscriminate restriction reflects an inappropriate standard that could apply far beyond its stated objective of preventing senior executives from being “insulated from legal risks.”

We also believe that the proposal is not an appropriate response to the opioid crisis facing our country. Our Board and the entire Cardinal Health team care deeply about the devastation opioid abuse is inflicting on our families and communities. We are working to help solve this complex

 

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national public health crisis. We understand and take seriously our responsibility to maintain a rigorous anti-diversion program, while ensuring that medications are available for patients who need them. We are industry leaders in implementing state-of-the-art controls to combat the diversion of pain medications from legitimate uses. Our Board has been active in its oversight and review of our controlled substance anti-diversion program and other important opioid-related issues, including through regular briefings by management and through the formation in February 2018 of an Ad Hoc Committee of independent directors of the Board to assist the Board in its oversight of opioid-related issues. More information about the Ad Hoc Committee and the history of the Board’s engagement with and oversight of these important issues can be found in the “Proxy Summary” and “Corporate Governance” sections of this proxy statement and on our website, at www.cardinalhealth.com under “About Us — Corporate Citizenship — Addressing the Opioid Crisis: Board Engagement and Governance.”

Executive pay decisions aligned to performance and long-term shareholder interests. A core objective of our executive compensation program is to design and implement performance metrics that challenge our executives to meet and exceed business goals that deliver sustained performance. Historically, our performance metrics use the same non-GAAP earnings measures that we report to shareholders, with minor adjustments that we explain in our proxy statement. We have consistently excluded litigation recoveries and charges from these measures because: these items often relate to events that occurred in prior periods, or over multiple periods; they do not occur in, or reflect, the ordinary course of our business; and their timing and amount are inherently unpredictable. We believe that these adjustments are appropriate when incentivizing executives to make decisions that are aligned with the long-term interests of shareholders, since litigation recoveries and charges may be outside of the scope of management performance or may reflect decisions made by an earlier management team. We have not, however, excluded the significant legal defense costs of opioid litigation or the significant costs of our controlled substance anti-diversion program from our compensation performance metrics. Consequently, these costs have impacted our incentive program payouts.

In addition to financial performance, the Compensation Committee evaluates the decisions and behavior of each executive to ensure that our executives are leading in a manner that is consistent with the values embodied in our Standards of Business Conduct when determining incentive compensation. We believe that by considering individual results, company performance and code of conduct values, our incentive compensation programs are appropriately designed to align the interests of our senior executives with the long-term interests of our shareholders. In addition, our incentive plans and agreements provide that we may require repayment of cash incentives and gains realized under equity awards and we may cancel outstanding equity awards in specified instances of executive misconduct, including a material violation of law or of our Standards of Business Conduct that causes material financial harm to us.

Transparency and accountability in our executive compensation. We provide thorough disclosure of the adjustments made under our compensation programs for litigation recoveries and charges, including a reconciliation between GAAP and non-GAAP measures. If the Compensation Committee, in its discretion, determines that any additional adjustments are required, those additional discretionary adjustments also are disclosed. Shareholders are therefore able to see the exact adjustments we make. Also, we will publicly disclose any incentive compensation forfeitures or repayments from our executive officers under our clawback policies, except in certain circumstances explained in our Compensation Discussion and Analysis. Finally, we provide an annual say-on-pay vote to provide more direct and immediate insight into our shareholders’ views on our executive compensation program.

For the foregoing reasons, we believe that the proposal is overly restrictive and broad, and is not an appropriate response to the opioid crisis. Further, we believe that our approach to incentive compensation for our senior executives, which considers individual results, company performance and the values set forth in our Standards of Business Conduct, is an appropriate way to align the interests of our senior executives with the long-term interest of our shareholders.

 

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We received notice that Kenneth Steiner, 14 Stoner Ave., 2M, Great Neck, NY 11021, a shareholder owning no fewer than 500 shares of our common shares as of June 1, 2018, intends to present the following proposal at the Annual Meeting. The proposed resolution and its supporting statement, for which neither we nor the Board accepts responsibility, are set forth below.

The shareholder proposal and supporting statement read as follows:

Proposal 5 – Special Shareholder Meetings

Shareowners ask our board of directors to take the steps necessary (unilaterally if possible) to amend our bylaws and appropriate governing documents to give the owners of a total of 10% of our outstanding common stock the power to call a special shareowner meeting (or the closest percentage to 10% according to state law). This proposal does not impact our board’s current power to call a special meeting.

Special shareholder meetings allow shareholders to vote on important matters, such as electing new directors that can arise between annual meetings. This proposal topic won more than 70%-support at Edwards Lifesciences and SunEdison. This proposal topic, sponsored by William Steiner, also won 78% support at a Sprint annual meeting with 1.7 Billion yes-votes.

Nuance Communications, Inc. (NUAN) shareholders gave 94%-support in February 2018 to a rule 14a-8 proposal calling for 10% of shareholders to call a special meeting.

It is important that our company goes the extra mile and adopts an ownership threshold of 10%. Some companies have adopted an ownership threshold of 25% which can be unrealistic. An ownership threshold of 25% can mean that more than 50% of shareholders must be contacted during a short window of time to simply call a special meeting. And this effort must be funded from the pockets of shareholders which acts as an insurance policy that there is a financial need to call a special shareholder meeting. Plus many shareholders, who are convinced that a special meeting should be called, can make a small paperwork error that will disqualify them from counting toward the ownership threshold that is needed for a special meeting.

And the clincher to enable 10% of shareholders to call a special meeting is that Cardinal Health shareholders do not have any right to act by written consent and management seems set on shareholders never having such a right. Meanwhile hundreds of major companies enable shareholders to call a special shareholder meeting and to also act by written consent. It is prudent to enable 10% of shareholders to call a special meeting when there is absolutely no right to act by written consent.

Please vote yes:

Special Shareholder Meetings - Proposal 5

The Board of Directors’ Statement in Opposition to Proposal 5

The Board recommends a vote AGAINST Proposal 5, because we currently permit shareholders owning 25% of our common shares to call special meetings. The Board believes that it is not in the best interests of our shareholders to lower this standard so that holders of only 10% of our common shares are able to call special meetings. We believe that our existing provision, coupled with our robust shareholder engagement program and other meaningful shareholder rights (including annual director elections with a majority standard and a “proxy access” right for nominating directors), is appropriate for a public company of our size as it strikes a proper balance between ensuring accountability to shareholders and enabling the Board and management to run the company in an effective manner.

The calling of a special meeting should not be an ordinary or easily initiated process, but instead should reflect a broad consensus among shareholders. Special meetings are expensive and disruptive for a company with as many shareholders as Cardinal Health. Our Board and management must commit the time to prepare for the meeting and address the matters to be considered at the meeting. We also incur the costs to prepare, print and mail the required disclosure documents. Share ownership thresholds to call special meetings are intended to strike a balance between the shareholders’ right to call a special meeting in appropriate circumstances and the risk that shareholders representing a minority position would seek to disrupt the company with a special meeting. In contrast, the proposal would permit shareholders who may have short-term interests and hold only a relatively small portion of our shares to initiate a special meeting, even if a large majority of shareholders have little interest in or oppose the matters to be considered at the meeting. That is why 46% of the Fortune 100 companies that provide a special meeting right have a 25% ownership threshold.

The platform of a special meeting of shareholders with the support of less than 25% of our shares is unnecessary in light of our robust shareholder engagement program and our corporate governance structures. We maintain open and regular communication with large and small shareholders, financial analysts and shareholder advisory services about important issues relating to our business and governance. Shareholders can use our Annual Meeting of Shareholders to communicate their concerns to management, the Board and other shareholders. And our directors are accountable to shareholders through their annual election and our majority voting standard.

In light of our existing special meeting provision, our robust shareholder engagement program and other meaningful shareholder rights, the Board believes that adoption of the proposal is not necessary.

 

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Share Ownership Information

Beneficial Ownership

The table below sets forth certain information regarding the beneficial ownership of our common shares by, and the percentage of our outstanding common shares represented by such ownership for:

A person has beneficial ownership of shares if the person has voting or investment power over the shares or the right to acquire such power in 60 days. Investment power means the power to direct the sale or other disposition of the shares. Except as otherwise described in the footnotes below the table, information on the number of shares beneficially owned is as of September 10, 2018 and the listed beneficial owners have sole voting and investment power.

 

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Compliance with Section 16(a) of the Exchange Act

Based solely upon a review of Forms 3, 4 and 5 furnished to us and written representations from our officers and directors, we believe that all of our officers and directors and all beneficial owners of 10% or more of any class of our registered equity securities timely filed all reports required under Section 16(a) of the Exchange Act during fiscal 2018.

 

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Other Matters

General Information About the Annual Meeting of Shareholders

These proxy materials are being furnished to solicit proxies on behalf of the Board of Directors of Cardinal Health, Inc. for use at the Annual Meeting to be held on Wednesday, November 7, 2018, and at any adjournment or postponement. The Annual Meeting will take place at our principal executive office located at 7000 Cardinal Place, Dublin, Ohio 43017, at 8:00 a.m. Eastern Time.

These proxy materials include our Notice of Annual Meeting of Shareholders, our proxy statement and our fiscal 2018 Annual Report to Shareholders, which includes our Annual Report on Form 10-K. In addition, these proxy materials may include a proxy card for the Annual Meeting. These proxy materials are first being sent or made available to our shareholders commencing on September 26, 2018.

Notice of Internet Availability of Proxy Materials

As permitted by the SEC, we are providing proxy materials to some of our shareholders via the Internet. Commencing on September 26, 2018, we mailed a Notice of Internet Availability of Proxy Materials (the “Notice of Internet Availability”) explaining how to access our proxy materials or vote online. If you received the Notice of Internet Availability, you will not receive a printed copy of our proxy materials by mail unless you request one by following the directions included in the Notice of Internet Availability.

Record Date

We have fixed the close of business on September 10, 2018 as the record date for determining our shareholders entitled to notice of, and to vote at, the Annual Meeting. On that date, we had 299,864,949 common shares outstanding. Shareholders as of the record date will have one vote per share for the election of each director nominee and on each other voting matter.

Quorum

We will have a quorum to conduct business at the Annual Meeting if the holders of a majority of our common shares entitled to vote at the Annual Meeting are present, either in person or by proxy.

Board Recommendation

The Board recommends that you vote FOR the election of the nine director nominees, FOR Proposals 2 and 3 and AGAINST Proposals 4 and 5.

How to Vote

Shareholders of record. If you are a “shareholder of record” (meaning your shares are registered in your name with our transfer agent, Computershare Trust Company, N.A.), you may vote either in person at the Annual Meeting or by proxy. If you decide to vote by proxy, you may do so in any one of the following three ways:

Telephone and Internet voting is available through 2:00 a.m. Eastern Time on Wednesday, November 7, 2018. If you vote by mail, your proxy card must be received before the Annual Meeting to assure that your vote is counted. We encourage you to vote promptly.

Beneficial owners. If, like most shareholders, you are a beneficial owner of shares held in “street name” (meaning a broker, trustee, bank or other nominee holds shares on your behalf), you may vote in person at the Annual Meeting only if you obtain a legal proxy from the nominee that holds your shares. Alternatively, you may vote by completing, signing and returning the voting instruction form that the nominee provides to you or by following any telephone or Internet voting instructions described on the voting instruction form, the Notice of Internet Availability or other materials that the nominee provides to you. We encourage you to vote promptly.

 

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Changing or Revoking Your Proxy

Your attendance at the Annual Meeting will not automatically revoke your proxy. If you are a shareholder of record, you may change or revoke your proxy at any time before a vote is taken at the meeting by giving notice to us in writing prior to the Annual Meeting or in person at the Annual Meeting, by executing and forwarding to us a later-dated proxy or by voting a later proxy over the telephone or the Internet. If you are a beneficial owner of shares, you should check with the broker, trustee, bank or other nominee that holds your shares to determine how to change or revoke your vote.

Shares Held Through Our Employee Plans 

If you hold shares through our 401(k) Savings Plans or DCP, you will receive voting instructions from Computershare Trust Company, N.A. and can vote through one of the three methods described above under “How to Vote.” Please note that employee plan shares have an earlier voting deadline of 2:00 a.m. Eastern Time on Monday, November 5, 2018.

Broker Non-Votes

If you are a beneficial owner whose shares are held by a broker, as stated above you must instruct the broker how to vote your shares. If you do not provide voting instructions, your broker is not permitted to vote your shares on the election of directors, the advisory vote to approve the compensation of our named executive officers or the shareholder proposals. The inability of the broker to vote your shares on these proposals results in a “broker non-vote.” In the absence of voting instructions, the broker can only register your shares as being present at the Annual Meeting for purposes of determining a quorum and may vote your shares on ratification of the appointment of our auditor.

Voting

You may either vote FOR, AGAINST or ABSTAIN on each of the proposals. Votes will be tabulated by or under the direction of inspectors of election, who will certify the results following the Annual Meeting.

To elect directors under Proposal 1, our governing documents require that a director nominee be elected by a majority of votes cast in an uncontested election. If an incumbent director nominee receives a greater number of votes “against” than votes “for” his or her election, our Corporate Governance Guidelines require the director to promptly tender a resignation to the Chairman of the Board. Within 90 days following the certification of the shareholder vote, the Nominating and Governance Committee will recommend to the Board whether to accept the resignation. Thereafter, the Board will promptly act and publicly disclose its decision and the rationale behind the decision. Proxies may not be voted for more than nine director nominees, and shareholders may not cumulate their voting power. Proposals 2 through 5 each require approval by a majority of votes cast. For each proposal, abstentions and broker non-votes are not considered as votes cast and will not be counted in determining the outcome of the voting results.

How Shares Will Be Voted

The shares represented by all valid proxies received by telephone, by Internet or by mail will be voted in the manner specified. For shareholders of record who do not specify a choice for a proposal, proxies that are signed and returned will be voted FOR the election of all nine director nominees, FOR the ratification of the appointment of Ernst & Young LLP as independent auditor, FOR approval of the compensation of our named executive officers and AGAINST the shareholder proposals. If any other matters properly come before the Annual Meeting, the individuals named in your proxy, or their substitutes, will determine how to vote on those matters in their discretion. The Board does not know of any other matters that will be presented for action at the Annual Meeting.

Attending the Annual Meeting

To attend the Annual Meeting, you must be a shareholder as of September 10, 2018, the record date, and have an admission ticket or satisfactory proof of share ownership and photo identification. If you are a shareholder of record, you must present an admission ticket (which is attached to your proxy card) or you must present the Notice of Internet Availability. If you are a beneficial owner, in order to be admitted to the meeting, you must present either a valid legal proxy from your bank, broker or other nominee as to your shares, the Notice of Internet Availability, a voting instruction form or a bank or brokerage account statement. Anyone holding an admission ticket or other documentation not issued in his or her name will not be admitted to the meeting. Our Annual Meeting rules prohibit cameras, videotaping equipment and other recording devices, large packages, banners or placards in the meeting and prohibit use of a phone or other device.

You can call our Investor Relations department at (614) 757-4757 if you need directions to the Annual Meeting.

Even if you expect to attend the Annual Meeting in person, we urge you to vote your shares in advance.

 

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Communicating with the Board

Shareholders and other interested parties may communicate with the Board, any committee of the Board, any individual director or the independent directors as a group, by writing to the Office of the Corporate Secretary, Cardinal Health, Inc., 7000 Cardinal Place, Dublin, Ohio 43017 or sending an e-mail to bod@cardinalhealth.com. Communications from shareholders will be distributed to the entire Board unless addressed to a particular committee, director or group of directors. The Corporate Secretary will not distribute communications that are unrelated to the duties of the Board, such as spam, junk mail, mass mailings, business solicitations and advertisements.

Shareholder Recommendations for Director Nominees

The Nominating and Governance Committee will consider candidates recommended by shareholders for election as director. Shareholder recommendations will be evaluated against the same criteria used to evaluate other director nominees, which criteria are discussed under “Board Membership Criteria: What we look for” on page 9. Shareholders who wish to recommend a candidate may do so by writing to the Nominating and Governance Committee in care of the Office of the Corporate Secretary, Cardinal Health, Inc., 7000 Cardinal Place, Dublin, Ohio 43017. To be considered by the Nominating and Governance Committee for consideration at the 2019 Annual Meeting of Shareholders, a shareholder recommendation must be received no later than April 1, 2019.

Recommendations must include, at a minimum, the following information:

Shareholders who wish to nominate directors directly for election at an Annual Meeting of Shareholders in accordance with the procedures in our Code of Regulations, including under our proxy access provision, should follow the instructions under “Submitting Proxy Proposals and Director Nominations for the Next Annual Meeting of Shareholders” below and the details contained in our Code of Regulations.

Submitting Proxy Proposals and Director Nominations for the Next Annual Meeting of Shareholders

If you intend to present a proposal to be included in the proxy statement and form of proxy relating to our 2019 Annual Meeting of Shareholders under Exchange Act Rule 14a-8, we must receive the proposal at our principal executive office not later than the close of business (5:00 p.m. Eastern Time) on May 29, 2019. The proposal should be addressed to our Corporate Secretary at Cardinal Health, Inc., 7000 Cardinal Place, Dublin, Ohio 43017. We will not be required to include in our proxy statement or form of proxy a shareholder proposal that we receive after that date or that otherwise fails to meet the requirements for shareholder proposals established by SEC regulations.

If you intend to present a proposal for other business or a nomination for election to the Board at our 2019 Annual Meeting of Shareholders (other than any such proposal included in our proxy statement and form of proxy under Exchange Act Rule 14a-8), you must comply with the notice requirements set forth in our Code of Regulations and such business must be a proper matter for shareholder action. Among other requirements, you must deliver proper written notice to our Corporate Secretary at our principal executive office no earlier than July 10, 2019 and no later than the close of business on August 9, 2019. If the date of the 2019 Annual Meeting of Shareholders is more than 30 days before, or more than 60 days after, November 7, 2019, written notice must be delivered after the close of business on the 120th day prior to the meeting, but before the close of business on the later of the 90th day prior to the meeting or the 10th day after we first publicly announce the date of the meeting.

Our Code of Regulations includes a proxy access provision, under which a shareholder, or a group of up to 20 shareholders, owning at least three percent of our outstanding common shares continuously for at least three years, may nominate and include in our proxy materials director nominees constituting up to the greater of two nominees or 20% of the Board, if the shareholders and the nominees satisfy the requirements specified in our Code of Regulations.

If you intend to request that director nominees be included in our proxy materials under our proxy access provision, you must comply with the notice and other requirements set forth in our Code of Regulations. Among other requirements, you must deliver proper written notice to our Corporate Secretary at our principal executive office no earlier than April 29, 2019 and not later than the close of business on May 29, 2019. If the date of the 2019 Annual Meeting of Shareholders is more than 30 days before, or

 

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more than 60 days after, November 7, 2019, written notice must be delivered after the close of business on the 150th day prior to the meeting, but before the close of business on the later of the 120th day prior to the meeting or the 10th day after we first publicly announce the date of the meeting.

Corporate Governance Guidelines

You can find the full text of our Corporate Governance Guidelines on our website at www.cardinalhealth.com under “About Us — Corporate — Investor Relations — Corporate Governance — Corporate Governance Documents.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department.

Transfer Agent

Shareholders of record should direct communications regarding change of address, transfer of share ownership, lost share certificates and other matters regarding their share ownership to Computershare Trust Company, N.A., P.O. Box 505000, Louisville, KY 40233. Our transfer agent may also be contacted via the Internet at www.computershare.com/investor or by telephone at (877) 498-8861 or (781) 575-2879.

Other Information

This solicitation of proxies is made by and on behalf of the Board. The cost of the solicitation will be borne by Cardinal Health. In addition to solicitation by mail, proxies may be solicited by our directors, officers and employees in person or by telephone or other means of communication. These individuals will receive no additional compensation for soliciting proxies but may be reimbursed for reasonable out-of-pocket expenses in connection with such solicitation. We have retained Alliance Advisors at an estimated cost of $16,500, plus reimbursement of expenses, to assist in our solicitation of proxies from brokers, nominees, institutions and individuals. We also will make arrangements with custodians, nominees and fiduciaries to forward proxy solicitation materials to beneficial owners of shares held of record by such custodians, nominees and fiduciaries, and we will reimburse these persons for reasonable expenses they may incur.

If you and other residents at your mailing address own common shares in street name, your broker or bank may have sent you a notice that your household will receive only one set of proxy materials unless you instruct otherwise. This practice is known as “householding,” and is designed to reduce our printing and postage costs. However, if you wish to receive, now or in the future, a separate annual report and proxy statement, you may write to our Investor Relations department at 7000 Cardinal Place, Dublin, Ohio 43017, or call the Investor Relations Line at (614) 757-4757. We will promptly deliver a separate copy (free of charge) upon request. If you and other residents at your mailing address are currently receiving multiple copies of annual reports and proxy statements and wish to receive only a single copy, you should contact your broker or bank directly.

 

By Order of the Board of Directors.

September 26, 2018

Jessica L. Mayer
Executive Vice President, Deputy General Counsel
and Corporate Secretary

 

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This proxy statement contains financial measures that are not calculated in accordance with U.S generally accepted accounting principles (“GAAP”). In addition to analyzing our business based on financial information prepared in accordance with GAAP, we use these non-GAAP financial measures internally to evaluate our performance, evaluate the balance sheet, engage in financial and operational planning and determine incentive compensation because we believe that these measures provide additional perspective on and, in some circumstances are more closely correlated to, the performance of our underlying, ongoing business. We provide these non-GAAP financial measures to investors as supplemental metrics to assist readers in assessing the effects of items and events on our financial and operating results on a year-over-year basis and in comparing our performance to that of our competitors. However, the non-GAAP financial measures that we use may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. The non-GAAP financial measures disclosed by us should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations to those financial statements set forth below should be carefully evaluated.

Exclusions from Non-GAAP Financial Measures

Management believes it is useful to exclude the following items from the non-GAAP measures presented in this report for its own and for investors’ assessment of the business for the reasons identified below:

The tax effect for each of the items listed above, other than the transitional tax benefit item, is determined using the tax rate and other tax attributes applicable to the item and the jurisdiction(s) in which the item is recorded. The gross, tax and net impact of each item are presented with our GAAP to non-GAAP reconciliations.

 

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Fiscal 2018 GAAP to Non-GAAP Reconciliations

 

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